Bank of Hawaii Corp (BOH) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 Bank of Hawaii Corporation earnings conference call. My name is Francine, and I am 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)

I would now like to turn the presentation over to your host for today's call, Ms. Cindy Wyrick, Director of Investor Relations. Ma'am, you may proceed.

Thank you, Francine, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter of 2010. Joining me this morning is our Chairman and CEO, Peter Ho; our Vice Chairman and Chief Financial Officer, Kent Lucien; and our Vice Chairman and Chief Risk Officer, Mary Sellers. Comments today will refer to the financial information that was 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. Now I'd like to turn the call over to Peter.

Thanks, Cindy. Good morning, everyone, and thanks for joining us. Bank of Hawaii finished 2010 with solid financial performance. During the year we improved profitability, and maintained strong levels of liquidity, capital and reserves. Our credit quality continued to improve, as did the Hawaiian economy. Deposit generation remains solid throughout the year for Bank of Hawaii, with average consumer core deposits up 9% versus last year, and growth in new consumer checking accounts up 7% versus last year. In the fourth quarter our loan portfolio grew slightly on a period-end basis compared with the previous quarter.

This morning, as is our custom, I've asked Kent to review our financial performance, and then Mary will comment on our improving credit quality measures. Kent?

Thank you, Peter. Good morning. Net income for the fourth quarter was $40.6 million or $0.84 per share compared to $44.1 million or $0.91 per share in the third quarter, and $40.5 million or $0.84 per share in the fourth quarter of 2009. There were no securities gains this quarter compared to $7.9 million in the third quarter and $25.7 million in the fourth quarter of 2009. A return on assets in the fourth quarter was 1.24%, and return on equity was 15.1%. Year-to-date net income was $183.9 million or $3.80 per share, an increase from last year of $144 million or $3 per share. Year-to-date return on assets was 1.45%, and return on equity was 18.2%. Our efficiency ratio was 52.3% for the year.

Our net interest margin in the fourth quarter was 3.15% compared to 3.27% in the third quarter and 3.57% in the fourth quarter of 2009. Year-to-date net interest margin was 3.41% compared to 3.72% in 2009. Our lower margin was primarily due to lower yields on our investment and residential loan portfolios, and a lower level of loans versus a higher level of investments.

The credit provision in the fourth quarter was $5.3 million compared to $13.4 million in the third quarter. The credit provision for the fourth quarter equaled net charge-offs and was lower than the third quarter, primarily due to $7.3 million in recoveries on previously charged-off construction loans. Our allowance for loan and leases at the end of the fourth quarter remained at $147.4 million or 2.8% of outstanding loans and leases. Non-performing assets was $37.8 million at the end of the fourth quarter, down $7.4 million from the end of the third quarter. Included in non-performing loans are $28.2 million in residential mortgage loans.

Non-interest income for the fourth quarter was $51.5 million, down from $63.1 million in the third quarter and $80.8 million in the fourth quarter of 2009. The decrease from the prior quarter was primarily due to $7.9 million in realized gains in the securities portfolio and $2.9 million from the sale of our Mutual Funds business in the third quarter. Overdraft fees were $900,000 lower. Our opt-in rate for customers who have previously incurred electronic overdrafts in the past six months is now approximately 38%, and our budget assumes that overdraft fees will be $14 million lower in 2011 compared to 2010.

Year-to-date non-interest income was $255.3 million, down from $267.8 million in 2009. Non-interest expense totaled $88.7 million in the fourth quarter, down $1.2 million from the third quarter. The decrease from the prior quarter was primarily due to the $5.2 million repo termination loss in the third quarter. Offsetting this reduction was a $1.9 million accrual for our cash bonus program, a $1.4 million increase in net equipment expense, and $1 million contribution to the Bank of Hawaii Foundation. Year-to-date non-interest expense was $346.2 million, down $3.8 million from last year.

The effective income tax rate was 24.5% in the fourth quarter compared to [24.7%] in the third quarter and 41.3% in the fourth quarter of 2009. The lower effective tax rate compared to 2009 was primarily due to the release of reserves from tax years under audit by the IRS for the LILO and SILO issues. The audit of those years is now closed. Year-to-date the effective income tax rate was 29.3% as compared to 35.2% last year. The lower rate for the year was primarily due to the sale of a low income housing investment in the first quarter, the sale of our equity, interest, and two leverage leases in the third quarter, and the release of reserves in the fourth quarter.

Our investment portfolio now stands at $6.7 billion, up $306 million from the third quarter. The average duration of the portfolio is 2.3 years. We continue to invest on a conservative basis, primarily in Ginnie Maes, and small amounts of state and municipal securities; and we have unrealized gains in the portfolio of $84 million. Loan balances increased slightly during the quarter by $24 million to $5.3 billion at quarter-end. There were increases in commercial mortgages, C&I and residential mortgages, partially offset by decreases in home equity and auto loans.

Deposits continued to grow during the fourth quarter to $9.9 billion, up $287 million compared to the end of the third quarter and up $479 million for the full year. Increases were primarily in commercial non-interest-bearing demand deposits and core consumer deposits. Our cost of deposits, including non-interest-bearing deposits, was 24 basis points.

We increased our wholesale funding with government entities by $285 million in the fourth quarter, and our average cost of public repurchase agreements is 9 basis points. Our shareholders' equity decreased $28 million from the third quarter to $1 billion, and tangible common equity to risk weighted assets is now 19.3%. The decrease was primarily due to a $38.7 million change in the valuation of the available for sale investment securities due to higher interest rates.

We paid out $21.7 million in dividends in the fourth quarter. We continued our share repurchase program in the fourth quarter and repurchased 258,000 shares of common stock for $11.7 million. Our remaining buyback authority is $63.9 million as of December 31. Our Board declared a $0.45 per share dividend last Friday.

And now I'll turn the call over to Mary Sellers.

Thank you, Kent. Net charge-offs for the fourth quarter were $5.3 million, down $8.1 million on a linked-quarter basis. The decrease was primarily due to $7.3 million in recoveries from two previously charged-off commercial construction loans. For the full year, net charge-offs were $51.6 million, down $36.1 million year-over-year, driven off a $26.9 million decrease in gross charge-offs and a $9.3 million increase in recoveries.

Non-performing assets were $37.8 million or 71 basis points at the end of the quarter, down $7.4 million from the third quarter. Commercial non-accrual loans decreased $4.6 million, largely due to the sale of a commercial construction loan, while consumer non-accrual loans increased $1.2 million due to an increase in residential mortgage. Foreclosed real estate was down $4 million given the sale of two commercial properties. Year-over-year non-performing assets decreased $10.5 million.

At quarter-end, loans past due more than 90 days and still accruing interest totaled $7.6 million, down $3 million on a linked-quarter basis and $6.1 million year-over-year, driven off reductions in residential mortgage. Restructured loans not included in non-accrual loans, or loans past due 90 days or more, totaled $23.7 million at year-end. This was a $700,000 increase from the prior quarter. Residential mortgage loans that were modified to assist our customers in retaining their homes accounted for $12.2 million of the total. Consistent with the improving Hawaii economy, we continue to see stabilization on a linked-quarter basis, and improvement year-over-year, in what we consider to be the higher risk segments of our portfolio. Our land loan portfolio totaled $23.8 million at the end of the fourth quarter, down $4.4 million on a linked-quarter basis and $14.1 million year-over-year.

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 year, higher risk exposure in our residential mortgage portfolio totaled $20.3 million, down $1.1 million from the third quarter and down $3 million year-over-year. In our home equity portfolio, higher risk exposure totaled $23.2 million. This represented an $800,000 decrease on a linked-quarter basis and a $4.9 million decrease year-over-year. Consistent with the reductions in higher risk, early stage delinquency in both the residential mortgage and home equity portfolios also continued to improve, with the 30 to 89 day delinquency rate flat at 83 basis points on a linked-quarter basis and down 25 basis points year-over-year.

At the end of the fourth quarter, commercial construction loans totaled $80.3 million, with $34.1 million in residential homebuilding exposure. Higher risk exposure totaled $15 million, down $3.4 million from the third quarter due to the previously mentioned loan sale.Only $300,000 of the total $80.3 million in commercial construction loans is non-performing. At the end of the fourth quarter, our allowance for loan and lease losses remained at $147.4 million or 2.8% of total loans and leases. However, with continued stability in the Hawaii economy and continued improvements in credit quality, including reductions in the higher risk segments of our portfolio, we anticipate a lower level of allowance will be required going forward.

I'll now turn the call back to Peter.

Thank you, Mary. The Hawaii economy continued to improve during the fourth quarter due to an increasingly stronger visitor industry. Through the month of November, total visitors rose 8.6%, and visitor days increased 8.9% compared to last year. Visitor spending in Hawaii is accelerating and has grown by double digits for three consecutive months. Statewide unemployment, while still at a higher than historical level, has remained at 6.4% for the past five months, as state job growth has begun to stabilize. Median home prices on Oahu rose 3.1% amidst 13% growth in sales velocity and reducing inventories.

While we're pleased with our results in 2010, and the improving Hawaii economy, we believe future economic growth will be somewhat muted in the near-term when compared to previous expansionary recovery periods. We remain cautious in 2011 due to revenue headwinds from recently enacted financial reform legislation, an interest rate environment complicated somewhat by certain intended stimulus programs, and what remains a still weak loan environment.

Now, before we open the call to questions, I'd like to provide you with a time-honored tradition of Bank of Hawaii, our quarterly weather report. The five-day forecast for the state of Hawaii is a high of 80 degrees and a low of 69, with gentle tradewinds and no precipitation. Airline and hotel prices are still reasonable, and this is a great time to come visit us in Hawaii. And now we would be happy to respond to your questions.

Francine, if you would open the call to questions, please?

(Operator Instructions)Andrea Jao of Cowen.

-'d like to start with a question for Kent. What is your interest rate outlook and if your interest rate outlook in sales higher rates in the near-term, do you have any plans of harvesting some of the security gains and then I have a follow-up for Mary.

Okay. Well, Andrea, I've come to the conclusion that it's impossible to really predict interest rates and so I just am not going to venture into that territory. We're mindful of the risk of increasing rates. We've tried to position the portfolio with that in mind. As a consequence, we've limited the duration. As to harvesting gains in the future, that's always a possibility. I just don't want to speculate as to whether that will in fact occur. It, quite honestly, it depends on the circumstances at the time, but the driving factor really is whether or not we adjust our duration in the portfolio and if as a consequence we realize gains in the process, then so be it.

Okay, so it's reasonable for me to expect some gains in 2011 similar to 2010?

Well, Andrea, I just have to correct you on that. Not necessarily so. What I'm trying to say is those things are possible. I just would not anticipate that necessarily.

Okay, got you, fair enough. Then my follow-up question for Mary is you already mentioned that we should expect the lower level of reserves going forward. You are quite highly reserved, but what's your outlook on net charge-offs for 2011, if it's possible for you to give that to us, because I wanted a sense of how quickly you'll be comfortable running down reserves and what you would consider, given current economic conditions in Hawaii, what you would consider a normal reserve ratio?

Well, Andrea, what level of reserves are required and what direction in terms of charge-offs will really totally depend on the economy. We're seeing improvement, so we're expecting that number to move directionally lower. But it's tough for me to give you anymore direction than that at this point.

Okay, thank you. Had to try. Take care.

Thanks, Andrea.

Brett Rabatin from Sterne Agee.

Hello, everyone. Wanted to follow-up on that question about the reserve and just ask, I guess, the easiest question is in the fourth quarter the reserve didn't decline any, but credit obviously is getting better and the economy continues to improve. What kept the reserve declining this quarter?

I think we continue to consider some of the fragility within the US economy. Also, within our higher risk segments we saw improvement year-over-year, modest improvements on a quarterly basis, improving trends in delinquency. I think a little more stability there would make us more comfortable.

Okay. And then any sense of magnitude where you feel, and I know it's tough to forecast, but just could the reserve be meaningfully lower by the end of next year if the economy continues to improve, or do you feel like, Mary, that is going to slowly rundown and so maybe there won't be much of a reserve release?

I would anticipate the latter.

Okay.

Like Andrea, you probably won't get more than that.

Fair enough. And then wanted to ask on fee income. You gave some guidance around the Reg E issue. Can you talk some about interchange fees? I know we haven't got a finalization of all that yet, but just where do we stand in terms of relative exposure to that line item? I know interchange fees, I think, year-to-date as of 9-30 were about $16 million, at least as of the regulatory filings.

Okay, the interchange number in total is around $24 million and so to the extent we're talking about a three-quarters reduction in the rate, then the annualized impact to us would be $18 million. Now for the single year of 2011, it's obviously a much smaller number compared to 2010, because it takes effect in I believe it's August and so the year-over-year impact is more on the order of $4 million to $5 million compared to 2010. But going forward, it's a bigger number.

Okay. And then also just wanted to ask, I want to make sure I understood, Kent. It sounds like you're planning to change the duration of the securities portfolio somewhat. Can you give us your thoughts on margin stabilization going forward and any change? I didn't hear the duration for the portfolio during the call so maybe I missed that.

The current duration is 2.3 years and we don't have any immediate plans on that point on making any change, but it is subject to change depending on conditions. So, the duration can change also as a function of changing rates irrespective of the positioning of the portfolio. There's a relatively high balance of mortgage securities in the portfolio and so durations can move merely as a function of rates.

Okay. And then just going to the margin question, I assume nothing changes in terms of rates and your loan portfolio continues to grow modestly. Has the margin stabilized at these levels?

I hope so, but again, it will depend. We saw uptick in rates late in the fourth quarter. All other things being equal, that can have a positive impact going forward, but it's a very slow modest kind of a change. It takes time for changes in interest rates to run through the portfolio to have an impact on the margin.

Okay, fair enough. Thanks for all of the answers.

Great.

Joe Gladue from B. Riley.

Yes, hi. Congratulations on a good quarter. Just wondered if you could, I guess, give us your current thoughts on capital. You continue to build up a big amount of capital and I know you instituted the buyback last quarter, but still continue to build.

Yes, in terms of capital, as you saw from the dividend declaration, we're planning to continue to pay a healthy dividend and really virtually everything beyond that in terms of what we earn, we would be looking to return to the shareholders in the form of share repurchases.

All right. And I guess just wondering if you could give us a little more detail on those two recoveries that you had during the quarter. Just give us a little color on what the loans were and how you ended up with such a large recovery?

One was a self-storage facility, construction loan for a self-storage facility that we were able to successfully negotiate a sale on and the other was related to a property note sale for a luxury project on the Big Island and we were just fortunate in negotiating a timely sale on that.

Okay, I think the rest of my questions have been answered, thank you.

Thank you.

David King from RBC Capital Markets.

Thanks, good morning everyone. So I guess first up, the loan growth this quarter, I thought that was rather encouraging. I think C&I loans in particular were up almost 5% or so. Was that driven by increases in line utilization or was that more market share gains and then, Peter, maybe you can just talk about demand in general right now?

Sure. Well, first on the C&I side, that was really driven more by our fortune in acquiring loan opportunities. So, we're still not seeing great utilization on undrawn lines. I'm sorry. And your other question was?

It was just demand. Well, it was line utilization and then it was demand in general?

Yes, I would have to characterize demand on the commercial side as beginning to be encouraging. We still haven't seen the type of activity that I think would characterize robust loan demand. Having said that, I think that our team has been very effective in winning mandates for lending opportunities. On the consumer side, I think that loan demand is still pretty tepid and so our hope is to stem the rundown there. I think that's possible given market conditions, but we're going to have to work a little bit harder on freeing up our delivery channels, as well as taking a look at some of the underwriting that we have in place relative to the cycle that we find ourselves in. The point of the cycle we find ourselves in right now.

Okay, that's helpful. And then, I guess, as a follow-up on the capital management question earlier. Given your substantial liquidity, I guess, how do you guys think about the tradeoff of buying securities out there yielding less than 2% or Fed Funds that call it 20 basis points or so versus using after-tax funds to buyback your stock that's yielding 3.7%, I guess, almost 4% right now?

Yes, that's a very good point and that's why we're, let's call it, stepping up to fully using the capital we're generating for that purpose. So I hear you on that and it also occurred to us that that's a pretty good tradeoff.

Okay. So, if the stock were to be at reasonable levels, is it fair to assume that that buyback activity may accelerate then going forward a little bit? What's holding you back from doing that?

Oh, there's nothing holding us back. We want to make sure we have the right amount of capital for the potential loan growth that we may have. We want to have enough capital for interest rate risk and so, as you know, we're pretty conservative in terms of overall management. But aside from that, we're off and running, buying back stock.

All right, thanks so much.

Great, David, thanks.

Craig Siegenthaler.

Thanks, good morning. It's actually good afternoon for some of us on the line. It's Craig Siegenthaler from Credit Suisse. First, just want your perspective here on deposit trends. I know this is really a tough one, but how many more good quarters of deposit generations do you think we have left here and also given the lift in unemployment here, do you think the Hawaiian Island could de-couple at all from the US in terms of deposit growth trends?

Yes Candidly, we've been surprised by our deposit performance ourselves. I'll tell you that over the past three years, we've put a lot of effort and concentration into brand building, as well as improving our experience through our branch system. And so, when you look at the kind of performance we're getting, in particular consumer a side both in terms of new account acquisition as well as just absolute dollars in core deposits, the results are very, very encouraging. The unemployment situation, de-coupling from the -- I think that's a tough, that would be a tough analysis and I say that because so much of our visitor industry is tied to the US market. It really is kind of the straw that stirs the cocktail here and so until we see improvement in the overall US domestic economy, we'll continue to kind of chug along with relatively small but certainly noticeable improvement in the visitor side, and really the visitor side is what drives the economy out here.

Got it. Thanks a lot, Peter, and just one kind of follow-up here. Maybe you could help us on how you view excess capital here given your high level and many of the metrics we look at. And also how you look at in terms of as loans come back one day in terms of loan growth and take up a bigger part of the balance sheet, with that should come higher risk weightings. So, what's your view of excess capital here? If you think over the next year or two where would you like to take that down and maybe what metrics are you looking at?

Well, let's take it in reverse order and I'll talk about what we see out there in terms of loan growth and then I'll flip the question over to Kent on the capital side. Even if we get back to a point of very robust loan growth, on a percentage basis it really is not that big a number. I mean it is $5.5 billion at 10% is $550 million. Certainly, we have the capital to maintain that. And having said that, I'm not of a mind that we're going to be back to that kind of loan activity any time in the near future. I feel very good with the improvement we made in the quarter, but I think that that's substantially different from getting back to a high single digit loan environment. I think that's a ways out there. On the capital side?

Well, in addition to kind of a metric of capital to risk weighting, we do need to take account of interest rate risk. That's definitely out there for us. As you can see from the balance sheet we have a large investment portfolio, so we definitely have to bake that into the equation. Even though we're holding government securities, rate risk is a factor. But as I've mentioned before, we're essentially out there with a statement that earnings that we generate here are going to be devoted to dividends and share repurchases. So, we think we're in very good position to do that and so that's the plan.

And Kent, just one follow-up. It's more of future earnings going towards buybacks and dividends. That's more how you're looking at it right now rather than using excess capital you already have in payback more than your earnings run rate?

Yes.

All right, great. Thanks for taking my questions.

Yes.

Erika Penala of Banc of America.

Good morning.I'm going to continue to beat up the dead capital horse, but is there any other opportunity that you see within your marketplace where you could redeploy the capital besides buying back stock? And also, given that asset generation continues to be a struggle for the industry, have you and the Board gotten more amenable to perhaps looking at opportunities outside the footprint or you're steadfast in focusing in Hawaii?

I think that your characterization is pretty accurate. We're steadfast and focused on Hawaii. That is clearly where we think we generate superior returns and so that's going to remain our focus. Opportunities in market, I really can't think of anything that would come to mind that would point us in that direction. So, I think from an acquisition standpoint, we're going to be pretty reflective of our recent history.

Okay. And with regards to the current environment for deposit fee pricing, could you give us a sense on sort of whether or not you or your competitors have started to address their deposit fee pricing structure in a more wholesale manner to combat some of the Reg reform headwinds that you mentioned?

Yes, that's a good question. We feel fortunate to have the kind of profitability that we have, such that we have a bit of room here to observe what's happening in the marketplace. And I think that we need to take a reasonably long-term view here and while deposits are priced one way in our internal profitability system, I don't think it takes too much of a leap of faith to see an environment where that profitability is substantially higher. So, we're trying to be very thoughtful with respect to how we introduce fees into our deposit products. We think we have, frankly, a little bit more room than perhaps others just from a margin standpoint. But having said that, to be perfectly candid, there hasn't been a whole lot of surprises to the positive in that whole discussion. So, it's something that we continue to talk about. I know that there are a number of people in the industry that had a similar positioning to ours that are beginning to move towards the venue of charging fees on accounts, but we're not quite there yet.

Okay. And when you said that there haven't been any surprises to the positive, are you talking about stemming from the language of Reg reform or stemming from how your competitors have reacted to Reg reform?

I was thinking specifically towards the actual recommendation coming down on interchange and the cut and profitability there.

I see. Okay, thanks for taking my call.

Yes.

Brian Zabora from Stifel Nicolaus.

Thanks, good morning. Guys, just a question on the loan growth again. Do you have any pipeline numbers you could share with us, maybe last quarter versus where it might stand this quarter?

Yes, I'll tell you that the commercial pipeline remains relatively healthy. I really don't want to get into quoting numbers here. And then on the consumer side, the mortgage pipe is beginning to move back towards more normal levels coming off the heels of, as you know, what has been a very robust mortgage volume environment.

Okay. And just one follow-up question on the OREO gain. Was that just one property, the $1.3 million gain?

No, there were two.

Okay. So and what's, I guess, how many properties did you dispose of during the quarter? Any additional details on that line item?

On foreclosed real estate?

Yes.

We disposed of two.

And that's it?

Two commercial assets.

Okay. All right, thanks for your help.

Yes.

Bobby Bohlen from KBW.

I apologize if I missed the number, but did you provide the dollar amount of the tax reserve that was released in the quarter?

I did not. It was $5 million.

So the LILO/SILO is now behind you?

Yes.

Okay, thank you. That was my only question.

Thanks, Bobby.

Aaron Deer of Sandler O'Neill & Partners.

Hi, good morning, everyone. Just bringing together some of the thoughts that you have had in terms of outlook for loan growth and margin thoughts. The net interest income has dropped for a few quarters now, despite having seen earning assets up like 5% or something over that period. Is it your sense that we are now at an inflection point and maybe we can start seeing that interest income line start to grow back again.

Boy, I hate to talk about it growing. As I mentioned, we did have a little bit of a bump up in interest rates in the fourth quarter. Longer term that will improve the performance of the investment portfolio. But that will take some time. So I would hate to characterize this as an inflection point, anticipating much growth.

Aaron, this is Peter. One of the things that we are focusing on is in a normal rate environment you can think through the fundamentals, I think, a little bit more differently than the rate environment that we find ourselves in right now, because at least our sense of it is that certainly at the short end of the curve we've got a number of programs in place that ostensibly are holding rates at a certain level. So we put an awful lot of thought around not so much as classic yield curve analysis, but really the situation we find ourselves in right now, which is what happens when that stimulus falls away? Do we get a more violent uptick in rates than perhaps we've been used to in the past?

Right. Wait, into that extent I guess how are you measuring the extension risk in the portfolio and you're obviously trying to position yourself to manage for that.

We're definitely aware of that and so in terms of the particular securities within the portfolio that we're acquiring that have that optionality, we're definitely trying to minimize the extension risk and that gets into the yield that we're going in at. So, we're buying a little bit higher yielding mortgages, albeit at a premium. It gets into the mix, so we're mixing in CMOs into the portfolio. So, we're cognizant of the risk and we're managing it accordingly.

Okay. And then just lastly, what are you looking for in terms of a run rate for the taxes this year? Are we going to get back to about 35%? Is that reasonable?

Yes, well, it's always a little bit hard to predict our conditional things and I've quoted between 30% and 35%. We could be in the low 30s.

Is that being helped by the municipal stuff that you've been put in on?

Not really.

No, okay. Okay, thank you.

Great. Thank you.

Casey Haire from Jefferies.

Good morning, thanks. Just a question on the competitive landscape. A couple of your competitors have been in the news recently. I was wondering if that had any impact on some of the commercial loan growth, as well as the deposit growth, which was both strong this quarter.

I think that we're competing quite effectively out there in the marketplace, both certainly on the commercial loan front and certainly on the deposit front. I know that on the deposit side we are picking up share, but to be honest with you I'm not sure. I can't tell you exactly which competitors that's coming from.

Okay. And then on just touching on the expenses, just given that you guys are going to be, it sounds like, pretty thoughtful or conservative about charging for accounts, as well as weak NII and you have FIN Reg reform in the form of interchange coming on. Is it safe to say that the efficiency ratio is going to run higher than that 50% target over the next year or two?

Yes, I think that's a fair characterization. I mean, I think we run pretty efficiently to begin with, so the analysis has to work around how do we maintain the level of -- the quality of operation that we have in place and become more efficient. And to do that, you're talking about or we're talking about making nips and tucks as situations arise versus any kind of broad expense reduction program.

Okay, great. Thanks.

Thanks, Casey.

And our next question comes from the line of Jeff Rulis from D.A. Davidson.

Thanks, good morning. I had a question about, I guess if you had any change in the frequency of ordering appraisals given that you've got declining net charge-offs and actually booking some gains on OREO sales, perhaps suggesting that your valuations approach clearing prices or I guess any change on the frequency of those appraisals?

Not really, because it's pretty well prescribed by the process of when we review a loan for charge-off and when we actually dispose of it. And that timeline on the residential front hasn't moved dramatically.

What is that timeline roughly?

Well, it takes about a year until final disposition and that's when we would do the updated appraisals.

Okay, thanks.

Yes, thanks, Jeff.

(Operator Instructions)Andrea Jao from Cowen.

I had a follow-up question for Kent. Is it possible for you to tell us the basis point impact on your capital ratios if unrealized gains were cut in half or if you just exclude unrealized gains?

Well, if you take $84 million and you after-tax that and adjust it by whatever percentage you'd like and then redo the math, that would get you the number.

Okay. And a follow-up question for Peter. For the Company in 2011, if you could tell us your top initiative or your top two initiatives, that would be great.

Sure. We think that this is a great period to take advantage of the positioning that we've afforded ourselves at this point in the cycle to really look at whatever initiatives we need to put in place simply to become a better organization in terms of customer acquisition, in terms of customer service, in terms of employee satisfaction. So, we have a number of initiatives and thoughts around how to do exactly that.

Is there anything planned for the Wealth Management arm?

Yes, that's a good question. The Wealth Management arm is, I want to say just under a year at this point, under way with a brand new investment platform. So, we've really transitioned completely at this point from a managed fund complex, which has been our history, a proprietary managed fund complex, which has been our history, to a purely open architecture environment. So, we're very excited about that. I think we have something really positive to sell in that product and what looks like an increasingly attractive market to sell into. So, I think that we can anticipate a lot of activity around making sure that we have the best front line staff as possible to help actualize that opportunity.

Thank you.

We have no further questions in the queue. I'd like to turn the call over to Ms. Cindy Wyrick for closing remarks.

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 additional questions or need further clarification on any of the topics we've discussed today, please feel free to contact me at any time. Have a great day, folks.

Ladies and Gentlemen, we thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.