Central Pacific Financial Corp (CPF) 2007 Q3 法說會逐字稿

Good day, and welcome to the Central Pacific Financial Corporation third quarter earnings call. Today's call is being recorded. This call may contain forward-looking statements concerning projections of revenue, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items concerning plans or objectives of management for future operation concerning future economic performance or concerning any of the assumptions underlying or relating to any of the foregoing. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, and may include the words believes, plans, intends, expects, anticipates, forecasts, or words of similar meaning.

While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such statements and assumptions are by their nature subject to risks and uncertainties and thus could later prove to be inaccurate or incorrect. Accordingly, actual results could materially differ from projections for a variety of reasons to include but not limited to the impact of local, national, and international economies and events, including natural disasters on the Company's business or operations and on tourism, the military, and other major industries operating within the markets we serve. The impact of legislation affecting the banking industry, the impact of competitive products, services, pricing, and other competitive forces, movements in interest rates, loan delinquency rates and changes in asset quality generally, and the price of the Company's stock. For further information on factors that could cause actual results to materially differ from projections, please see the Company's publicly available Securities and Exchange Commissions filings, including the Company's Form 10K for the last fiscal year. The Company does not update any of its forward-looking statements.

At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Clint Arnoldus, Chief Executive Officer. Please go ahead, sir.

Thank you, all for joining us today to review Central Pacific Financial Corps. financial performance for the quarter ended September 30, 2007. With me here today are Dean Hirato, our Chief Financial Officer; Blenn Fujimoto, our Hawaii Market Officer; and Curtis Chinn, our Chief Risk Officer. I'll be addressing the highlights of our Company and marketplace and Dean will provide a detailed financial report of our third quarter results.

Central Pacific Financial Corp. today reported net income of $9.1 million or $0.30 per diluted share compared to $20.6 million or $0.67 per diluted share for the same period last year. In light of the significant deterioration in the California residential construction market, combined with our committment to proactively manage credit risk, we downgraded 12 loans which resulted in a provision for loan losses of $ 21.2 million in the current quarter. Excluding this provision our quarterly net income and diluted earnings per share would have been $20.9 million and $0.69 respectively, both up from the same period a year ago. As you all know, the California residential construction market has been extremely volatile in recent months. Some of the California real estate developments we financed were indirectly impacted by subprime lending problems. In light of these uncertain market conditions, we conducted a proactive and thorough review of our California loan portfolio for existing and potential weakness.

While we acknowledge that real estate prices may decline further, over the long term, we are confident that we can manage our non-performing total asset ratio below 35 basis points. Additionally, over the long term, we are confident we can manage our net charge off, average loans ratio below our target of 10 basis points. Despite the current uncertainty in California, I want to reiterate the fact that this market will continue to play an important role in our diversification strategy. From an enterprise risk management standpoint, we continue to believe it's prudent to have a strategy that builds on geographically diverse markets.

The Hawaii market continues to provide us with attractive opportunities for growth and market share expansion. The economy in Hawaii is expected to expand moderately over the remainder of this year and into 2008. Growth in tourism, which is our states primary industry, has slowed as a result of the slowing in the national economy and the continued weakness in Japanese visitor arrivals. As a result, overall visitor arrivals are forecasted to be flat in 2007, increasing to 1.5% annual growth in 2008 and 2009. Despite the current slowing in tourism, our construction industry continues to expand with solid increases in private and government construction permit values reported during the first half of 2007. Additionally, the ongoing multibillion dollar military housing privatization project will support construction growth for the next several years.

Job growth and real personal income growth are both forecasted to post roughly 2% increases in 2007 before moderating slightly to 1.7% growth in 2008. Real gross domestic product is forecasted to increase by 2.8% this year and next year. At Central Pacific Bank, we have successfully launched our community based banking strategies. This model is designed to increase our competitive posture and deposit gathering particularly in the small business sector. In essence, we have decentralized our banking expertise and empowered our front line to become fully engaged within our marketplace. We also opened a branch in Central Oahu in September, our 39th location in the State. This Company also expects to continue expanding its presence by adding another branch in Lahaina Maui early next year.

We've realized the successful launch of our new Choice Checking product in October. Central Pacific Bank is the first bank in Hawaii to introduce this new innovative checking account that allows consumers to earn a CD-like interest rate if certain requirements are met, including direct deposit, using a check card to pay for daily purchases, and making payments online. Choice Checking provides Central Pacific Bank with a competitive advantage and an opportunity to attract new customers. The launch of Choice Checking follows on the banks first to market introduction of Remote Deposit Capture for small businesses in April 2007.

I'd also like to update you on our Bank Secrecy Act compliance initiatives. The regulators recently reviewed our improved BSA program and we are waiting the outcome of that review. We believe we've made substantial improvements to our BSA program and we believe we have satisfied the requirements of the November 2006 regulatory order. At this time our Chief Financial Officer, Dean Hirato, will review the details of our second quarter financial performance. Dean?

Thank you, Clint. My discussion will cover the third quarter of 2007 consolidated financial highlights for Central Pacific Financial Corp. And its subsidiaries. Third quarter 2007 net income was $9.1 million compared to $21 million for the third quarter of 2006 and $21 million for the second quarter of 2007. The decrease was primarily due to the provision for loan losses of $21.2 million in the current quarter as a result of down grades of 12 loans totaling $92 million with exposure primarily to the California residential construction market. On a per share basis, net income was $0.30 for the current quarter compared to $.67 for the third quarter of 2006 and $0.68 for the second quarter of 2007. Key performance ratios based on net income for the third quarter of 2007 on an annualized basis were as follows. Return on assets of 0.65%, return on tangible equity of 8.35%, return on equity of 4.8%, an efficiency ratio of 47.27% and a net interest margin of 4.29%.

Looking at our balance sheet, our total loans and leases of $4.1 billion as of September 30, 2007, grew by $308 million or 8% over September 30, 2006. On a link quarter basis, the increase was $136 million or 3.4% unannualized. Average loan balances increased by 1% sequentially. The average yield on loans of 7.73% for the third quarter of 2007 was flat compared to the prior year. On a link quarter basis, there was a decrease of 3 basis points. The decrease was due to a combination of lower real estate construction loans and increased competition in loan pricing.

Our total deposits of $3.9 billion as of September 30, 2007, increased by $160 million or 4% over September 30, 2006, and increased 1% on a sequential quarter basis. We experienced growth in demand deposits of $7 million and time deposits of $31 million during the current quarter. Over the coming quarters, we expect to see growth in core deposits as a result of our community based banking strategy and remote deposit capture and Choice Checking products as discussed earlier in the call. The effective cost of interest bearing liabilities for the current quarter was 3.42%, an increase of 42 basis points over the prior year. On a linked quarter basis, the increase was 2 basis points.

The net interest margin of 4.29% for the third quarter of 2007 decreased by 25 basis points from the same quarter last year and decreased by 7 basis points on a sequential quarter basis. The year-over-year compression in the net interest margin was primarily due to a shift in the composition of the deposit base into higher rate time deposits. The sequential quarter compression was primarily attributable to the September ease by the Fed which resulted in the downward repricing of floating prime rate loans partially offset through the lowering of rates paid on certain deposit products. Over the coming quarters, we expect our net interest margin to be in the 4.2 to 4.3% range.

As discussed earlier, the provision for loan and lease losses of $21.2 million for the current quarter resulted from the downgrades of 12 loans totaling $92 million. The 12 loans were broken out as follows. First, there were five residential construction loans totaling $54 million in Sacramento and the Inland Empire. Second, there were four land loans related to residential track projects totaling $24.6 million in Contra Costa, Inland Empire, and Bakersfield. Third, there was one land loan for mixed use development of $8 million in Palm Springs, and two, land loans totaling $5 million in Washington. Due to market deterioration during the quarter, the collateral values of these loans have significantly declined and guarantor liquidity has diminished.

Other operating income was $11.8 million for the current quarter, an increase of 11.5% over the same quarter last year. The increase was primarily due to higher mortgage origination activity from Central Pacific Home Loans, and increased income from bank owned life insurance. On a linked quarter basis, other operating income was up 2%, primarily due to higher income from bank owned life insurance. Other operating expense was $31.6 million for the current quarter, compared to $31.2 million in the same quarter last year and $31.3 million in the second quarter of 2007. The expected quarterly run rate is in the $30.5 million to $31 million range. The effective tax rate was 23% for the current quarter compared to 35.86% in the same quarter last year and 34.51% in the second quarter of 2007. The sequential quarter decrease reflects the disproportionate recognition of state and federal tax credits compared to taxable income for the current quarter.

At September 30, 2007, non-performing assets totaled $30.8 million or 55 basis points of total assets compared to $8 million or 15 basis points at September 30, 2006, and $1.4 million or 2 basis points at June 30, 2007. The sequential quarter increase was primarily attributable to three California land loans related to residential track projects totaling $29.6 million that were placed on non-accrual status. Last quarter, we identified two land loans totaling $14.6 million in the Riverside and Fresno Counties that we were closely monitoring. This quarter, we identified a third land loan of $15 million in the Contra Costa County. Although this loan was current as of September 30, 2007, due to the significant decline in the land value, this loan was also placed on non-accrual status. Specific reserves have been provided for all three of these loans and these reserves are included in the current quarter provision discussed earlier.

Loans delinquent for 90 days or more and still accruing interest totaled $0.9 million at September 30, 2007, compared to $1.9 million a year ago and $0.6 million at June 30, 2007. Net loan charge-offs were $92,000 in the current quarter compared to $603,000 in the year ago period and $205,000 in the second quarter of 2007.

Shareholders equity at September 30, 2007, was $744 million or a tangible equity ratio of 7.92%. Through the third quarter of 2007, we have repurchased approximately 918,000 shares with 1.2 million shares remaining under the current stock repurchase authorization. With our current stock price at such attractive levels, we see this as a great opportunity to enhance shareholder value and currently expect to repurchase 600,000 shares per quarter over the next two quarters. The outlook for 2007 is based on the following assumptions. First, net interest income growth will be driven by expected loan growth of 6 to 8% and deposit growth of 3 to 5% combined with a stabilized net interest margin in the 4.2 to 4.3% range. Second, barring any further market deterioration, we expect the provision for loan losses to approximate 1.2 million to $1.5 million per quarter for the fourth quarter of 2007 and in 2008.

We will continue to actively manage overhead costs in order to sustain our strong efficiency ratio and we will continue to take advantage of market opportunities to optimize our capital levels and enhance shareholder value. Based on these assumptions and current economic and business conditions, management is forecasting diluted earnings per share for 2007 in the range of $2.31 to $2.36. This concludes the discussion of Central Pacific Financials financial results for the third quarter of 2007 and I'll now open up the call for the Q&A session.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Brett Rabatin with FTN Midwest.

Hi, good afternoon.

Hi, Brett.

I've got a ton of questions but let me just ask a few here. First, can you tell us what the specific impairment reserve is for the loans that you've addressed this quarter? Is it essentially the provision in 3Q or is it a different number?

Brett, this is Curtis Chinn. If your question is what do we have reserved against the three non-performers, it's $12 million.

Okay, so is it fair to assume that as you address these, basically that their provisioning in Q4 assumes that there are no other issues and you've addressed all of your issues in 3Q and your impairment reserve, if you mentioned $12 million is essentially the charge-off that you'll have for those loans that you indicated in 3Q?

The reserve on the $12 million does cover those three NPA 's whether we actually expect that as charge-off remains to be seen. In terms of the process we went through, we did a very very thorough review. We looked at every credit in the residential portfolio on the mainland, so given that review and the information we have available, we're pretty comfortable with where we're at today.

Okay, and can you give us an update of your exposure on the mainland to know about $600 million is construction land in California and 4400 million of that is Sacramento, Riverside, et cetera. Can you talk about your mainland exposure today and just what you've been telling the production offices in terms of their pipelines and what they've been doing?

Right. I assume when you say mainland exposure, you're talking about the residential exposure?

Correct, but now you've got 1.2 billion, so if you could walk us through the whole piece, that would be good.

Okay, in terms of the total, you're right. The total mainland portfolio is 1.2 billion in outstandings, 971 million in California. The breakdown in terms of construction and development which would include the land and A&D portion would be about 660 million with most of the balance in term type of product. In terms of the exposure to the Inland Empire, in terms of total exposure, the Inland Empire is 203 million, Sacramento MSA is about 211 million. In terms of the mainland residential portfolio, about 358 million in total outstandings in California, 330, Inland Empire, 122 million, Sacramento 69 million.

Okay so the portfolio hasn't really changed much linked quarter?

Well, over the last six months, the residential portfolio has come down. We've reduced the commitments close to 75 million and reduced the outstandings roughly 30 million. In terms of the message that we've sent to the LPO's we stopped adding residential construction clients over 15 months ago and began to ratchet that down at that time.

Okay, I'll let some other guys address credit but I wanted to ask you on the margin and your guidance of 420 to 430, I guess first I'm trying to figure out was there any interest reversal in the third quarter on the non-accruals?

There was approximately $180,000 that was reversed out in connection with the three loans that are placed in non-accrual status.

Okay, I'm just looking at your margin guidance, 420 to 430 sort of stabilizing, and what you've got repricing and it looks, maybe you can update us on repricing as well but I know in 3Q you had over 2 billion of loans repricing, so you've got a fairly short loan portfolio, at least in terms of repricing with movement in prime but only about 700 million of CD's repricing, so is there an assumption for, is the assumption that the core deposit growth, is that meaningful or can you give us some additional color on the 420 to 430 guidance?

Yes. Again, just to give you a break down starting with the loan portfolio between the variable versus fixed, it's about a 65 % variable to 35% fixed. In terms of prime floating rate loans, we have about $1.2 billion in the portfolio, and with the Fed ease they talked about earlier, we're able to offset about 80% of that through reductions in our deposit rate products. But as far, your assessment going forward, I agree and it's an accurate assessment as far as why we believe that the margin will stay somewhere within the 4.2 to 4.3 probably trending closer to the lower end of the range over the coming quarters.

Okay, so it is somewhat predicated on core deposits, aside from the higher cost new product that you're rolling out presently?

Right. Yes, we don't see any significant change in the deposit mix but like we said with both the community based banking strategy combined with the remote deposit center and Choice Checking products so we expect to see growth in our core deposits.

Okay, thank you.

We'll take our next question from Joe Morford with RBC Capital Markets.

Thanks, good afternoon, everyone. Or morning I guess for you.

Hi, Joe.

I had a couple follow-ups on the credit issues. I'd be curious what the updated appraisals on the two loans identified last quarter which I think you said were $14.6 million, what they said they were currently worth, and are these two loans included in the 12 loans for $90 million that were downgraded this quarter?

The two loans that we identified last quarter were not in the 12 that were downgraded this quarter. They had already been downgraded in the second quarter.

Okay.

And I think you asked what were the values based on latest appraisals?

Yes.

Aggregate $11 million.

Okay, down from the 14.6 you said?

Yes.

Fair enough, and what's, particularly if you look at the broader pool of the 12, what's the current expectation for the game plan and the time line for resolution here?

Well, in terms of game plan, we're looking at a variety of situations to potentially sell loans and others where we are working with the borrower to restructure those loans. In terms of getting all of that achieved probably in the next quarter or two.

Okay, and then lastly, I had a question on expenses. I may have heard this wrong. Dean, did you say an expected run rate for the expenses was 30.5 million to $31 million?

Yes.

Okay, and so that's below the current run rate. What's driving that? Are there some reversals of incentive accruals or anything like that that might be contributing in there?

Yes. That's the primary factor that we would see in the fourth quarter that would bring the run rate down below the current quarter level.

Okay and then we would expect it to come back up off of that in the first quarter?

Right.

Okay, thanks very much.

We'll take our next question from Brian Roman with [Weiss, Pick, and Greer].

Good morning in your case. I'm a touch confused on a couple of definitional things. I think the $92 million in downgraded loans, those are not non-performing at this point?

No.

They are not?

We have three non-performers, and one of those was amongst the 12 that were downgraded in this quarter. Now, at the end you had a similar reference at the end of the second quarter. I think that was at about $30 million downgraded? Is that correct?

No.

We had--?

I know you referred to something at that point.

We referred to two loans that we had identified that were problematic and those are two of the three that are on non-performer.

So in other words, you're down similar to this quarter where you identified $90 million last quarter at the end of the quarter you identified $30 million and then a good chunk of that has gone non-performing, is that correct?

Yes, the two loans we identified as problematic and those aggregated $14 million were put on non-accrual status in the third quarter.

In the third quarter. So that's the uptick in non-performers?

Plus the other, the third loan which is $15 million was also identified for non-accrual this quarter.

Is there any chance some of this increment of the $92 million becomes non-performing?

At this point in time, no, but if there's further market deterioration of the magnitude that we experienced in the August/September time frame, that's always a potential. We can't predict that.

Okay. What else did I want to ask you? Just again definitional, 1.2 billion in loans in California, or pardon me, on the mainland, 971 in California, 660 is acquisition and development, and 530 is residential construction, is that correct?

No. Residential construction--.

Is that in the 660?

Yes, that is in the 660.

And what's in the 350?

The 358 includes residential construction projects plus land and acquisition and development loans related to residential projects.

Now I'm really confused. 971, you got 660 in A&D, that's land loans, the easiest way to describe it?

971 is the loans we have in California.

All right

Okay? In terms of the 660 number, that was the total of construction and land and acquisition and development, both residential and commercial construction.

Okay. All right, that's helpful. Do you have further residential and land commitments, loan commitments in California that haven't been funded?

Our total commitments for residential in California is 525 million. The outstandings against that was 330 million.

Do you envision those being funded? And I guess these are projects that--?

To the extent that we have performing loans, yes, those would potentially be funded. Part of what we are doing in many of these restructures is co-ops and commitments so my expectation is that over the next several quarters that committment number should be coming down.

By the way, I don't think, the 92 is in, so we got 92 billion in non-performers divided by 660, so you essentially are close to 14, 15% of this residential and construction and land acquisition portfolio is non-performing or close to it?

We have 30 million in non-performing.

That's fine. Okay, and last question, I promise, your collapsing commitments, you are telling your loan production offices to pull back. Did I hear right that you're still expecting 5% loan growth so if you are, where is it coming from?

It will be coming primarily out of Hawaii.

Okay and what type of loans are those?

The loan growth that I discussed was the expected loan growth for 2007.

Okay. I'm sorry.

That number that I gave you.

All right, thank you very much for your time.

We'll take our next question from Fred Cannon with KBW.

Thanks, and good morning. Sorry to harp on it, I just wanted to make sure I understood the migration in terms of the NPA's and the classifieds. So you, in the second quarter, you had the two that you announced that were classified that were about 15 million, and then those went into non-performers and you had one additional non-performer that totals $30.8 million; is that correct?

Those three loans aggregate roughly 30 million, correct. I think actually it's 29.6.

And then 12 loans were classified during the quarter totaling $92 million. Is that one $15 million loan also in that 92?

Yes.

Okay, so in order to, so total NPA's, in non-performers plus new classifieds would be 92 plus 31 minus the 15 because that would be double counting otherwise?

Correct.

Okay, that's very helpful. Secondly in terms of the classifications, can you let us know whether the classifications are special mention substandard or doubtful?

Well, we have a mix of special mention substandard and doubtful.

Okay, and so that, those 12 loans would be a mix of those three categories?

Correct.

And then if the market as you said deteriorates further in the fourth quarter and those loans migrate to being worse then you would have to increase the reserve level; is that correct?

Potentially, if there were something that occurred in the fourth quarter, yes.

Okay, great. Very helpful. Thanks very much.

We'll go next to [Sally Pope Davis] with Goldman Sachs.

I'm sorry, I didn't ring for a question.

(OPERATOR INSTRUCTIONS) We do have a follow-up question from Brett Rabatin with FTN Midwest.

Hi, I wanted to ask you as it relates to you mentioned, Clint, earlier, that you think you satisfied the BSA issues. One, is when do they come in again, and then, well I guess I'll just first let you answer that question.

Well, they've done all of the fieldwork they need to do to make their decision so it's being processed by the regulators right now. Okay. And we're optimistic.

So there could be a decision there then?

Yes.

And I guess what I'm getting at is one of the constraints to you doing acquisitions was obviously the BSA related MOU, so I'm curious, you gave guidance for share purchases to continue at a pretty good clip. Does this mean you're, for the time being not interested California in terms of M&A or can you give us A, kind of your thoughts on capital levels and then B, just acquisition appetite given what you've got going on currently?

Certainly. Our strategy in California remains unchanged; however, buying a financial institution is certainly on the back burner until things reach more stability in California, so whether that means 18 months, 24 months, we don't know right now, but clearly that's not an immediate strategy of ours. In terms of where we can get the best return on our capital, repurchasing shares is absolutely the best application we have today, so we're going to do that aggressively as we can, and continue to manage our tangible capital to the 6.5 to 7% range. So, acquisitions aren't a near term target for us.

Okay, and then additionally, I'm curious on mortgage banking, since you guys have acquired Hawaii Home Loans, that you had a quarter where things weren't quite as good as you expected and then they rebounded, the Hawaiian home market certainly is not as bad as a lot of areas in the country. I'm curious about the sort of prospects for mortgage banking in the near term and if there's any other efficiency things that you guys are looking at, I know at one point that was kind of a push.

This is Blenn Fujimoto, I'll answer that question. Actually we feel fairly positive about our mortgage banking operation. We have a good quarter. We expect to have another good quarter. Our run rate is pretty solid. We have some joint ventures that we do, we have five, we should be up to seven joint ventures with some brokerage operations and developers here in Hawaii. So we see a pretty steady pipeline which has been growing frankly with some of the collapse and some of the mortgage brokers in town so actually we feel pretty good about where we think we'll be in the mortgage banking for the next few quarters.

Okay, and then just lastly on the loan side, I recall in the prepared comments you mentioned that pricing was still pretty tight. I'm curious to hear if that's in the mainland and Hawaii, just some thoughts, I know conduits are gone so I'm trying to get an impression from coverage banks as to if they're seeing any let up yet on a risk adjusted basis.

I'll answer that question again. Definitely in the mainland you'd see the movement to more the commercial sector and the pricing of that has dropped in our California operations. Locally, the pricing has still held up. It's still very competitive, but we are still getting fairly decent pricing here in our operations.

Okay, great. Thank you.

We'll take our next question as a follow-up from Brian Roman with Weiss, Pick, and Greer.

Yes, sorry to belabor the point. I'm just trying to understand. I had to get off for a second. I know there was a question about loan migration and definitions, I think Fred asked it. So last quarter was 30 million of identified loans, this quarter 90 million, are there, is there, can you just mention how many loan, what percentage of loans are on, incremental loans above these are on watch list or you have issues, potential issues with?

Yes, at this juncture we believe we've identified all of the issues in the mainland.

Okay, thank you.

You're welcome.

Next question comes from Rajiv Patel with SuNOVA Capital.

Hi, guys, thanks for taking the question. Just two quick ones. You mentioned that in Washington you had a couple land loans. Could you, that are on the watch list, could you kind of just go through what you're seeing in that market? Are you seeing kind of early signs of stress there or are these -- what type of properties are these?

In terms of the market overall, we've really not seen the kind of stress that we see in California, with respect to these two specific loans they are land loans related to -- one is related to residential and the other is mixed use and the reason for the downgrade in these are really more related to issues with the guarantor and his personal liquidity and cash flow drawing up in terms of the valuations of the property, those are still fine. The guarantor is working to have them refinanced and has indicated he's got banks lined up to roll these two properties into larger credit facilities, but given the way we look at credits we look at not only the performance of the project and the valuations but we also consider guarantor liquidity, so in these two instances, the borrower is really driven by guarantor issues.

And then just following up on Fred's question about the, you guys took about a $3 million impairment from 14 down to 11 on I guess two of the larger loans in NPA. Can you just comment, concerning those and just general things you're seeing in the California market, what's the range of writedowns or depreciation you're seeing on these land values?

Well, the range is very very broad and it's very locationally driven but in some instances, we're seeing I would say the range is in the 10% to 30% range and that's really driven by a function of what sustaining inventory in a given locale, proximity to job centers, whether there are large national home builders in the vicinity. There a lot of factors at play in terms of driving valuations today.

Okay, and so then are you, the loans which you downgraded, the 12 or so of them, are you guys trying to get new appraisals on the property values of those loans or are you kind of in talks with the borrowers or what stage are you in there?

In several instances, we have new appraisals or are in the process of collecting, gathering new appraisals. We're also talking with all of the borrowers in terms of resolution to the issues. I think I mentioned previously that on many of these loans we are in the process of restructuring the loans.

Okay, great. Thanks a lot.

We do have a follow-up question from Fred Cannon with KBW.

Oh, thanks. Just quickly I was wondering in the Hawaiian market if you're seeing any impact of the weak dollar and the stronger yen in terms of Japanese visitors or any interest to the Japanese investors in real estate?

This is Curtis Chinn. Actually, we are beginning to see some uptick in tourism and I've heard that there's renewed interest from Japanese investors in real estate in Hawaii.

Okay, thank you.

We have another follow-up question comes from Joe Morford with RBC Capital Markets.

Thanks. Back on the credit side, you downgraded 92 million of loans in the quarter. What's kind of your total criticized asset pool at this point?

Roughly 130 million.

Roughly130 million, okay. And as you down grade credits, do you have to provision, is there a certain amount you have to provision as a percent of the appraised value depending on the grade?

There are percentages that we apply to the loan balance. Whether we use a standard number or some other number, it would be a function of the evaluation of the appraisal.

Okay, and then lastly on a totally separate issue, just Dean, the tax rate going forward, is there any guidance as to what's a better rate to use there?

The expected run rate would be approximately 35%.

Beginning even in the fourth quarter?

Yes.

Okay. Thanks very much.

We have a question from Aaron Deer with Sandler O'Neill.

Hi, good afternoon, guys.

Hi.

I've got a question about this new checking product that you mentioned. What is the rate that you're offering on that and what kind of hurdles are there for the customer to have that rate and if they fall short of that what does the rate drop down to?

The current rate on that product is a 4.55% rate. One of the things we have to do is we have to use 15 debit card transactions per month, and of the balances we pay that, it's up to $25,000, so anything over that and ending where they don't use the behaviors of having a direct deposit and Internet banking as well as the 15 debit card transactions, those rates drop to 0.05%. Either above 25,000 0.05 or if we don't do the behaviors it's 0.05%.

Do you model in some assumption in terms of how many customers fail to meet those hurdles?

Yes, we expect a certain amount of breakage on that, so we probably think close to 65% will not hit that hurdle rate.

Okay, that's helpful. Thank you.

We have a follow-up from Brett Rabatin with FTN Midwest.

Hi, guys, I just wanted to ask -- I noticed, I know the Hawaiian economy is really strong but I noticed that the hotel occupancy rate at coming under 80%, at least it was a couple months ago, it was under 80% so I'm curious one, if you guys have any updated numbers on hotel occupancy in the past month or so? And then two if you could just talk about commercial real estate exposure to hotel/motels and if you're seeing any weakness in that portfolio?

I haven't seen the recent numbers on occupancy so we don't have that at this point. In terms of exposure to hotels, we have roughly close to 50 million to $60 million range and no issues on that.

So pretty minimal exposure. And then secondly, just wanted to go back to California and try and get a better flavor for the construction projects and I know these things are a case-by-case basis, but can you talk about the construction projects that you have where you're seeing weakness, have the borrowers come back and put more equity in the deals to get cash to boost the interest reserves and keep the loans current or what's been the general trend in the construction portfolio, from sort of a 40,000 foot level?

Well, as we've mentioned earlier, we did go through every loan in that residential portfolio and this 358 million, what we see on the performing is that either you have positive absorption such that the project itself generates cash flow sufficient to service interest and/or the guarantors and borrowers have liquidity to cover that and where it's needed they have done so.

Okay, so is it fair to assume a portion of the performance portfolio is, and they've been kept current just based on more equity put into deals and hopefully they will be able to carry the properties until the sales pick back up ?

Well, for the performing portion of the portfolio, it's a combination of the projects performing as planned or generating sufficient cash flow on their own, and/or the guarantors have put in more equity or have the ability to put in more cash to provide additional support if it's needed.

Great. Thanks for the color.

That does conclude the question--.

I'd like to make, I'm not sure if I was clear on the Choice Checking product we have, the breakage is 35% and it's 65% will meet the requirements so I wasn't sure if I was really clear on that last response.

And that does conclude the question and answer session at this time I'll turn the call back over to Mr. Arnoldus for any closing remarks.

Want to thank you again for participating in our call today. In conclusion I'd like to reiterate a few important points. We're actively managing our exposure in the California residential construction market. Our Hawaii market is a healthy market and our banks well capitalized, fundamentally solid, and performing strongly. We continued to create and execute innovative deposit gathering strategies. We're confident that over the longer term, we can manage our non-performing asset to total asset ratio below 35 basis points. Additionally over the longer term, we're confident we can manage our net charge-off to average loans ratio below our target of 10 basis points. These are certainly challenging times, but challenging times often bring opportunity. In summary we remain confident that we'll successfully execute our business strategies in the coming quarters. Thank you.

This does conclude today's conference call. We appreciate your participation, and you may disconnect at this time.