Question-and-Answer Session
Operator
[Operator Instructions]. And your first question comes from the line of Andrea Jao of Lehman Brothers. Please proceed.
Andrea Jao - Lehman Brothers
Good morning, everyone.
Daniel C. Stevens - Vice Chairman and Chief Financial Officer
Good morning.
Allan R. Landon - Chairman, President, and Chief Executive Officer
Good morning.
Andrea Jao - Lehman Brothers
Last quarter LILO credit-to-net interest income contributed 5 bps I believe to margin expansion. So, this quarter I assume that went away and the drag on the margin was 5 bps?
Allan R. Landon - Chairman, President, and Chief Executive Officer
Last year, last quarter above 5 bps was attributable to LILO. This quarter we've had a 2 to 3 bp drag on our margins based on this excess liquidity... short-term access liquidity in our deposits that I mentioned in my talk.
Andrea Jao - Lehman Brothers
Okay. So, the rest of the 9 bp decrease is the LILO credit going away?
Allan R. Landon - Chairman, President, and Chief Executive Officer
Yes.
Andrea Jao - Lehman Brothers
Okay. And then, there has recently been disconnect between LIBOR and Fed fund. I was hoping you could talk a bit more about the impact on that, on the asset side of your balance sheet, on the funding side, and if this has been drag or a benefit to your margin?
Allan R. Landon - Chairman, President, and Chief Executive Officer
As of this morning there is about 40-basis point spread between LIBOR and Fed funds, and the way our balance sheet is structured, it has a slightly beneficial impact, but not much. We are pretty well balanced in our balance sheet structure.
Andrea Jao - Lehman Brothers
Okay, perfect. Thank you very much.
Operator
Your next question comes from the line of Jim Bradshaw of D.A. Davidson. Please proceed.
Jim Bradshaw - D.A. Davidson & Co.
Good morning.
Allan R. Landon - Chairman, President, and Chief Executive Officer
Hi, Jim.
Jim Bradshaw - D.A. Davidson & Co.
Al, I have been seeing some of you competitors offering some... a bit more aggressive CD [Certificate of Deposit] rates than historically we've seen in your markets. Can you talk about what the deposit pricing market has been like over there recently?
Allan R. Landon - Chairman, President, and Chief Executive Officer
We have noticed that too.
Jim Bradshaw - D.A. Davidson & Co.
How fast.
Allan R. Landon - Chairman, President, and Chief Executive Officer
I think deposits supply maybe tightening up a little bit, and that maybe what we are seeing. But we haven't seen it long enough to really reach any conclusions about it. It maybe just one institution or another at a point in time, feel like in the need for more funding.
Jim Bradshaw - D.A. Davidson & Co.
Okay. And, I sort of, woven into said when I saw folks having thirstier demands or deposits, I wondered if we were seeing an increase in internal loan generation in the Islands. Just wanted your guess feel for how the pipeline looks compared to a quarter ago, and are you seeing anything unusual in payoff activity or as the economy gets a little tighter in some markets, or you start to see that payoff activity is beginning to stretch out or slowdown a bit too?
Allan R. Landon - Chairman, President, and Chief Executive Officer
Peter would you like to... just give some comments there?
Peter S. Ho - Vice Chairman, Chief Banking Officer
Sure, on the... in terms of funding, things seem to be relatively stable. E&I growth is pretty strong. On the pay-down side, we are seeing pay-downs in our dealer book. We've got a reasonably sized book of dealer loans and what we are seeing is that they are not purchasing inventory for '08 as aggressively as they have in years past and they really went beyond the '07 level. So, that's one factor that's a bit different from the quarters past. Now the other area on pay-down side that we are seeing some activity on is along the construction side, and our.... in our book, we've got a reasonably small construction portfolio. But we saw about a 35% pay-down rate annualized in the third quarter, which I think probably just follows from our positions, right now.
Operator
And your next question comes from the line of Brent Christ of Fox-Pitt, Kelton. Please proceed.
Brent Christ - Fox-Pitt, Kelton
Good morning.
Allan R. Landon - Chairman, President, and Chief Executive Officer
Good morning.
Brent Christ - Fox-Pitt, Kelton
Just in terms of the recent Fed rate cut, could you talk a little bit about how that kind of impacted your balance sheet dynamic in terms of the repricing at least in the couple of weeks since the Fed rate cut? How do you see that playing outside I guess over the next quarter or two in terms of the impact in the margin?
Allan R. Landon - Chairman, President, and Chief Executive Officer
Well, as I mentioned on my comments, we've been dealing with a very difficult interest rate environment, given the structure of our balance sheet. The Fed fund cut and depending if they cut this month or wait until January, has a nominally beneficial impact on our margin. I think I had mentioned that when we were at the Lehman Brothers Conference; and so there is more of a positive impact because of the Fed fund cuts just based on the way our balance sheet is structured. But it's not huge. And also given just the uncertainty in the market, and the impact that could have on the yield curve or Fed decisions, we are kind of cautiously looking at this, saying it will nominally help us, but we are not looking at outside of volume increases in the business side to have a huge impact on our margin.
Brent Christ - Fox-Pitt, Kelton
Got you. Okay. And then secondly, just from a credit-quality perspective, are you seeing anything in your book that would change? I guess you've been matching provision or with charge-offs for quite some time that would suggest that would change? Or in other words, do you see anything that would make you feel like you need to build reserves a little bit? I know you guys have a pretty healthy reserve level as it is.
Allan R. Landon - Chairman, President, and Chief Executive Officer
We don't see anything on the horizon right now that will change our reserving approach or that would be that kind of observable data that we should do an increase. You know Mary anything you want to add to that?
Mary E. Sellers - Vice Chairman, Corporate Risk
No I would agree, Al. We revisited every quarter but I would agree, nothing on the horizon at this point.
Operator
Your next question comes from the line of Fred Cannon of KBW. Please proceed.
Frederick Cannon - Keefe, Bruyette & Woods
Thanks and good morning. Just a follow up on the deposits. I notice that the savings balance... average saving balances were up about $200 million or so I believe, linked quarter, and the rate on those moved up. Was there any special kind of money market rate changes or anything you did in that category?
Daniel C. Stevens - Vice Chairman and Chief Financial Officer
As I mentioned, a lot of our deposit increase was caused by a single customer deposit of about $200 million. $200 million of that was with us for most of the third quarter. $100 million still stays, but that's in the middle of third of September, that $200 million deposit left us. So that increase was largely due to that. And also as I mentioned, excess liquidity that came to the Bank of Hawaii during the height of the liquidity issues surrounding the sub-prime market.
Frederick Cannon - Keefe, Bruyette & Woods
Okay. So that was in that category?
Daniel C. Stevens - Vice Chairman and Chief Financial Officer
Yes.
Frederick Cannon - Keefe, Bruyette & Woods
Okay and then right, the liquidity issue and that will come off okay.
Daniel C. Stevens - Vice Chairman and Chief Financial Officer
Yes.
Frederick Cannon - Keefe, Bruyette & Woods
And then just a general question, Al, on the capital management. I know you guys did increase your dividend by I think about $0.03. It was a little less on a percentage basis increase than we've seen in the last few years, and I was wondering if you could comment on your thought process, maybe any changes in your thought process regarding capital management?
Allan R. Landon - Chairman, President, and Chief Executive Officer
No changes, Fred. On the capital management, the target or the approach we use, you are right, we had a choice between $0.03 and $0.04 and chose the way it's just looking at kind of all the economic indicators and anticipating what would happen next year. So our dividend portion of our capital return program should be in that 40% range looking forward.
Operator
And your next question comes from the line of Erika Penala of Merrill Lynch. Please proceed.
Erika Penala - Merrill Lynch
Good morning.
Allan R. Landon - Chairman, President, and Chief Executive Officer
Hi Erika.
Erika Penala - Merrill Lynch
You spoke about your confidence with your consumer portfolio, but is there anything on the corporate side that you are watching more closely?
Allan R. Landon - Chairman, President, and Chief Executive Officer
On the C&I side, Erika?
Erika Penala - Merrill Lynch
Or anything non-consumer related?
Daniel C. Stevens - Vice Chairman and Chief Financial Officer
Down the commercial line then. I would say that probably the portfolio that has the most scrutiny right now is our construction book, just given market conditions in the residential home building segment. That's a $254 million book of business for us and about just under 60% it's residential home builders. Looking at that... looking through that portfolio that we feel pretty good, most of that... most of that exposure is to kind of mid-market, mid-tier type product, and that product continues to move nicely in our marketplace.
Erika Penala - Merrill Lynch
Okay. And everything else for commercial-related is fine?
Daniel C. Stevens - Vice Chairman and Chief Financial Officer
Yes.
Erika Penala - Merrill Lynch
Okay. Thanks for the time.
Operator
[Operator Instructions]. And your next is a follow-up from the line of Andrea Jao. Please proceed.
Andrea Jao - Lehman Brothers
Hello, again. I believe the leverage ratio is at... it's below the 7% kind of benchmark that you have. This means that share purchases will be a fad slower than they have been in past quarters until, your leverage ratio goes back up to 7%?
Allan R. Landon - Chairman, President, and Chief Executive Officer
Well, I think we are slightly under 695. Our capital leverage position at maintaining a 7% are based either on dividends or share repurchase, we are paying with that and we haven't change that. So, we are slightly under, but that's still our target.
Andrea Jao - Lehman Brothers
Okay, perfect. And then --
Allan R. Landon - Chairman, President, and Chief Executive Officer
We've may have been just touched below that at the end of the second quarter and when those things happen for us, any number of reasons, we'll just take a period of time and gradually work it back, the 7% target remains.
Andrea Jao - Lehman Brothers
Okay. And my follow-up question would be, I know a small portion of your loan book. I believe it is in California, and correct me if I am wrong, but could you talk about that portion of loan book in... your comfort level then what you're seeing?
Allan R. Landon - Chairman, President, and Chief Executive Officer
Andrea you are talking, I think about real estates, Andrea, commercial real estate. It is $15 million in exposure.
Andrea Jao - Lehman Brothers
Okay.
Allan R. Landon - Chairman, President, and Chief Executive Officer
Two credits, both in Southern California, one is a multi-family complex in Los Angeles; the other one is the retirement community in the Valley, both performing as we would anticipate. But it's a very small portion of our overall real estate portfolio on the commercial side.
Andrea Jao - Lehman Brothers
Okay, perfect. Thank you very much.
Operator
And this does conclude the question-and-answer session. I will now turn it back to management for closing remarks.
Cindy Wyrick - Head of Investor Relations
I'd like to thank you everyone for joining us today. As always, if you have additional questions or need further clarification on any of the topic discussed today, please feel free to give me a call. Have a great day everyone.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.
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