Bank of Hawaii - Earnings Call - Q2 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Bank of Hawaii Corporation Second Quarter twenty twenty Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, this conference is being recorded. I would now like to hand the conference over to Cindy Warwick, Director of Investor Relations.

Please go ahead.

Speaker 1

Thank you, Carmen. Good morning, good afternoon, everyone. Thank you for joining us today. On the call with me this morning is our Chairman, President and CEO, Peter Ho our Chief Financial Officer, Dean Shigemura and our Chief Risk Officer, Mary Sellers. 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. During the call, we'll be referencing a slide presentation as well as the earnings release. A copy of the presentation and release are available on our website, boh.com, Investor Relations. And now I'd like to turn the call over to Peter Ho.

Speaker 2

Great. Thanks, Cindy. Good morning, everyone. Before I start our comments, let me just give you a little commentary on Hurricane Douglas, which came through the islands this weekend. Yesterday, Douglas actually missed the Big Island without actually going to a hurricane warning, passed by both Oahu and Maui, where we were in a hurricane watch, but really had a somewhat nominal impact from from the storm.

And then thankfully cleared Kauai late last night or actually early this morning. So from that standpoint, we obviously feel blessed and fortunate to have have made it through this near miss and given the circumstances, we'll certainly take that. Today marks Bank of Hawaii's six month anniversary in our dealing with the COVID-nineteen pandemic as our first executive all hands meeting was held on January 27. And I have a notation in my outlook calendar that describes that meeting as a meeting to discuss the virus in China, how things have changed in six months. As you know, COVID-nineteen has had a dramatic effect on nearly all aspects and walks of life globally and nationally.

Hawaii certainly has been impacted no differently. And while we're one of the nation's best performing states by infection statistic to date, the consequences of the virus have been economically dramatic. This past Friday, our board met to hold a regularly scheduled board meeting. At that meeting, I presented a six month review of our COVID-nineteen response. And I thought before we get into the heart of our quarterly review, I'd share with you some of what I shared with them.

I segmented my review into our core stakeholders, our community, our customers, our teammates, and of course our shareholders. From a community standpoint, we recognize that as a leading company in the islands for nearly one hundred and twenty three years, people expect us to take a leadership role and to give of ourselves freely in times of crisis and need. From a leadership standpoint, I and other members of our management team and board of directors are actively engaged in numerous philanthropic organizations, government sponsored task forces, and private sector committees engaged in supporting and leading our community at this time. Our foundation also made early in the pandemic, a $3,000,000 gift to the Hawaii Community Foundation to provide COVID-nineteen humanitarian health and economic support to the community. This is the largest corporate gift to date in the islands and as was our hope, helped to spur further support from the corporate community.

I note that funding, as I mentioned, was provided directly from our foundation whose capital base is separate and distinct from the bank. Finally, from a community standpoint, Bank Hawaii Foundation recently released a study called COVID nineteen in Hawaii facts and insights. The study was performed by Anthology Research, a respected local market research company, was based on live and online survey data from over 1,000 respondents, making it the largest study of its kind in Hawaii. To date, we believe the study will help better inform the general community and help local policymakers make informed decisions. From a customer standpoint, we've been very active in providing real solutions and resources to many parts of our customer base.

We made over 4,500 PPP loans totaling over $560,000,000 We've helped more than 17,000 people realign their loan terms in support of the near term dislocations caused by the pandemic. With numerous government stimulus and deferral programs afoot during the pandemic, we saw contact center volumes spike 69 in the month of April, requiring enormous commitment and support from our contact center staff. Also, as customers have sheltered closer to home, we've seen unprecedented digital banking activity. Thanks to many years of focus on our digital channels, we've been gratified to see year to date mobile deposit growth of 36%, online deposit account openings growth of 300%, online mortgage app growth of 142% and online HELOC app growth of 79% year to date as compared to last year. As for our teammates, we've been able to hold FTE levels steady.

With our cafeteria operations suspended, we've created a program called Meals To Go, preparing a weekly to go meal available to all employees. To date, we've distributed nearly 13,000 meals serving over 50,000 people. We encourage our employees to share their meals with family, friends, and neighbors. Our employees' health is our paramount concern and we spent over $280,000 on PPE and plan to spend ultimately approximately $2,000,000 on plexiglass barriers and thermal scanning equipment. We've built a phone based daily health screening app for our employees and are in the process of upgrading our filtration and air replenishment infrastructure to multiples of industry standard.

Finally, for our shareholders, to date we've been able to weather the storm while maintaining solid financial and business results. Our market valuation as measured by price to book continues to lead our marketplace. We continue to gain market share in both loans and deposits on a one year basis through threethirty one of this year. We continue to fortify our balance sheet from credit losses in a measured, appropriate and balanced way. Before I turn the call over to Mary, who will brief you on credit quality and then Dean, who will discuss our financials, I wanted to finish off with a quick review of the local Hawaiian economy.

Let's go you got that? Okay. Unemployment in Hawaii moved from 2.4% in March to 23.823.5% in April and May as the stay at home orders and travel quarantine orders went into place in the islands. June unemployment, however, improved dramatically to 13.9% in part as a result of the partial reopening of the local economy and in part due to the PPP and other federal stimulus programs. The green columns represent UHERO's most recent forecast, which is foundationally what we incorporate into our own risk and financial modeling.

As you can see, these numbers peak up in the following quarters. Ultimately, the direction of future unemployment will be impacted by whatever new federal stimulus comes about and the timing of such, as well as the trend and infection rates here in the islands which will best drive policy decisions around the rate of reopening. On the next slide, you'll see a longer term forecast for unemployment. And on the next page, you see GDP and personal income forecast showing 2020 declines of 115%. I think I had applied the same contingencies on directionality of the accuracy of these forecasts at this time.

Fundamentally, Bank of Hawaii remains well positioned. We have solid credit statistics. Our base operation continues to grow in a challenged environment. Our liquidity and capital levels are robust. Now let me turn the call over to Mary Sellers.

Speaker 3

Thank you, Peter. At the end of the quarter, the loan portfolio net of PPP balances totaled 11,300,000,000 and reflective of our island economies remained 60% consumer and 40% commercial with 76% secured with high quality real estate with a combined weighted average loan to value of 56%. We believe this portfolio construction built off conservative underwriting and disciplined portfolio management will continue to provide a superior outcome and continue to allow us to support our customers and community through these difficult economic times. Credit metrics remained strong and relatively stable in the second quarter. Net charge offs totaled $5,100,000 or 18 basis points annualized on average loans, up $1,400,000 for the linked period and up $2,800,000 year over year.

Non performing assets totaled $22,700,000 at period end, up $2,100,000 from the first quarter and up $900,000 from the 2019. Criticized loans outstanding increased $1,400,000 to $201,600,000 or 1.71% of total loans. The credit provision was $40,400,000 which after net charge offs of $5,100,000 resulted in a $35,200,000 increase in the allowance for credit losses. The increase is reflective of our best estimate of increased losses in the portfolio given the company's credit risk profile and the current outlook and forecast for our market with the impact of COVID-nineteen. As Peter noted, the estimate was anchored off UHERO's most recent baseline forecast, but also considered the uncertainty of this path to recovery.

At the end of the quarter, the ratio of the allowance for credit losses to total loans and leases was 1.47% or 1.53% net of PPP loans. And the reserve for unfunded commitments was $2,500,000 at the end of the period, down $800,000 from the first quarter and down $4,300,000 from December 3039. Through the end of the second quarter, we've provided payment relief to over 17,000 customer accounts on balances totaling $1,900,000,000 or 16% of total loan and leases outstanding. After peaking in April, we saw a significant decline in new requests for assistance from our customers, both consumer and commercial. 73% of the consumer loans with payments referrals are secured with residential real estate with a weighted average loan to value percent of these customers made at least one payment in the second quarter.

89% of the commercial loans with payment deferrals are secured with a weighted average loan to value of 51%. 92% of these customers made at least one payment in the second quarter. As previously discussed with COVID, a number of industries, particularly retail, lodging and restaurant and entertainment are facing significant challenges. In total, our commercial loan exposure to these industries remained flat for the linked period at 11% of total loans exclusive of PPP. Our retail segment totaled $600,000,000 or 5% of total loans with 91% secured by real estate with a 54% weighted average loan to value.

1.7% is unsecured and deferred and 99.9% of the unsecured exposure continues to pay interest. The lodging segment is $500,000,000 or 4% of total loans. 77% is real estate secured with 85% having a loan to value of less than or equal to 65%. 0.4% is unsecured and deferred. And 100% of our unsecured exposure continues to pay interest.

Finishing with the restaurant and entertainment segment, this segment is $100,000,000 or 1% of total loans. 39% is real estate secured with a weighted average loan to value of 63%. $23,500,000 is unsecured and deferred with an average exposure of $400000.96.9 percent of the unsecured exposure continues to pay interest. I'll now turn the call back to Dean.

Speaker 4

Thank you, Mary. As Peter stated, this was a good quarter for us despite the challenging environment. We continued our trend of loan growth in the second quarter with balances increasing by $453,000,000 linked quarter and by over $1,000,000,000 year on year. The second quarter loan growth of 4% was driven by $543,000,000 of PPP loans. Normalizing out the PPP loans and repayments on line draws resulting from the pandemic COVID pandemic, loans grew modestly by $16,000,000 in the quarter, and we expect moderate loan growth for the rest of the year.

In the second quarter, we experienced a record increase in deposits of nearly $1,400,000,000 or 8.5% linked quarter and 2,000,000,000 or 12.5% year on year, continuing our long history of deposit growth. While deposits resulting from PPP loan fundings and consumer economic impact payments contributed to the growth, deposit growth in the quarter came predominantly from our core consumer and commercial customers. We increased their balances by nearly $1,200,000,000 or 7.4%. In addition, we have reduced our public time deposits by $53,000,000 in the quarter to $610,000,000 Our deposit funding costs continued to decline during the quarter, ending at approximately 16 basis points. The low cost continues to provide us with flexibility for growth and profitability and is a mitigant against the impact of lower interest rates.

Subject to market conditions, we continue to opportunistically reduce the rates. With a comparatively low loan to deposit ratio of 68%, our solid and growing deposit base provides additional asset funding opportunities and pricing flexibility while reducing our funding risk profile against risk assets. A portion of the excess liquidity was deployed into our investment portfolio and increased balances by $300,000,000 to $6,000,000,000 We maintained the high credit quality and liquidity by adding AAA rated securities with reliable monthly cash flows. AAA rated securities represent 95% of the portfolio balances and 100% are A rated or better. The duration of the portfolio was three point one one years at the end of the quarter and well within our risk tolerances.

The investment portfolio remains a stable and secure source of liquidity for funding for our balance sheet. Our strong risk based capital levels improved in the second quarter and remained substantially above the well capitalized minimums. We added to our excess capital levels, improving our CET1 and Tier one capital ratios by 23 basis points to 12.04%. Our capital position was further enhanced by a reduction in risk assets, which decreased to 55% of total assets. We continue to hold significant amounts of capital in excess of minimum regulatory and well capitalized levels.

Our Tier one capital consists of $552,000,000 more of pretax dollars than is required to remain well capitalized and $826,000,000 above the regulatory minimum. These represent funds that can be deployed for growth or loss mitigation. Now I'll provide additional details on our financial results. Net income in the 2020 was $38,900,000 or $0.98 per share. Net interest income on a reported basis in the quarter was $126,700,000 up $700,000 from the previous quarter and up $2,600,000 from the second quarter last year.

Included in the second quarter net interest income was an interest recovery of $2,900,000 As Mary discussed, we recorded a credit provision of $40,400,000 this quarter. Noninterest income totaled $51,300,000 in the 2020, up $5,200,000 from the previous quarter and up $5,900,000 from the second quarter last year. Noninterest income in the second quarter included a gain of $14,200,000 from the sale of our remaining Visa shares. Adjusted for the Visa sale, lower noninterest income was due to lower deposit fees, other service charges and customer derivative revenue. For the 2020, we expect noninterest revenue to be approximately $37,000,000 to $38,000,000 Challenges continued due to lower levels of customer activity during the ongoing disruptions from the COVID pandemic.

Noninterest expenses in the second quarter totaled $80,900,000 a decrease of $7,400,000 from the previous quarter and a decrease of $3,800,000 from the same quarter last year. The second quarter in the second quarter, we accrued $1,100,000 in special bonuses, which were which ended in June for employees working on-site. In addition, we accrued $2,000,000 in corporate incentives, which is down from 5,500,000.0 accrued in the 2019. Noninterest expense in the 2020 included seasonal payroll expenses of $3,100,000 and severance expenses of $4,700,000 that were partially offset by the elimination of corporate incentives. For the remainder of 2020, we expect our quarterly noninterest expenses to be flat with the second quarter at approximately $89,000,000 The effective tax rate for the second quarter was 20.05%.

We estimate the rate will be approximately 20% to 21% for the remainder of the year. Our return on assets was point 82%. The return on equity was 11.58%, and our efficiency ratio was 50%. Our net interest margin in the second quarter was 2.83%, down 13 basis points from the first quarter and down 21 basis points from the 2019. The decrease was primarily due to lower interest rates and much higher levels of liquidity due to strong deposit growth, partially offset by seven basis points from the interest recovery.

After adjusting for the interest recovery, we expect our net interest margin will decline by approximately six to seven basis points in the third quarter from the continued impact of lower rates and additional liquidity. However, net interest income is expected to be approximately flat with the second quarter net of the interest recovery as loan growth and asset mix change are expected to mitigate the impact of the lower margin. Our estimates conservatively assume PPP loans are carried for a full twenty four months. Shareholders' equity was 1,350,000,000 at the end of the second quarter. During the second quarter, we paid out $26,800,000 or 68% of net income and dividends, and our share repurchase program remains suspended.

And finally, our Board declared a dividend of $0.67 per share for the 2020. Now I'll turn it back over to Peter.

Speaker 2

Great. Thanks, Dean. So thank you for your interest in Bank of Hawaii today. And now we'd be happy to entertain whatever questions you might have.

Speaker 0

Thank you. Our first question is from Casey Haire with Jefferies. Please go ahead.

Speaker 5

Yes. Thanks. Good morning, everyone. Good to hear that Hurricane Douglas did not do any damage. Good to hear.

Speaker 2

So You're the full one, Casey.

Speaker 5

Yes. Did get any stirring in, Peter?

Speaker 2

No. Hung that thing up a long time ago, friend.

Speaker 5

Understood. Just teasing. Okay. So maybe start on credit quality, Mary. Some of the slides are very helpful in terms of the forecast.

Obviously, it could take a couple more years before we get back to normal. But sort of as you guys think about your reserve build, taking it up again this quarter, what is that we're all looking at when tourism is open up to the island and the governor just pushed it back a month. Can you just frame it around that in terms of what your forecasts assume for when the islands are open again to tourism and just some sensitivities around there as we try to think about reserve build going forward?

Speaker 3

Sure. Well, we anchored off Yohiro, which really had the tourism industry opening very gradually late into the third quarter with very little occupancy occurring in 2021, 2020 and really being pushed out into 2021. And even at that point, really being at 40% to 50% of where we were in 2019.

Speaker 5

Okay. And so I mean, in terms of the visitors back in 2021, does it assume 50% return to pre pandemic levels? Or just trying to size what you guys are baking in or you hear I was baking in?

Speaker 3

So pre pandemic was about 80% occupancy. So at 40% to 50%, you'd be at about half.

Speaker 5

Sorry, missed that. All right. And then on the PPP loans for two years, you guys should we assume that, that means that liquidity, the cash balances are going to you guys are to run with that liquidity for that same amount of time? And then just following up on the NIM, the investment securities yields, what are the reinvestment rates currently? And how long if we don't get any relief on yields, how long will it take for the securities book to bottom?

Speaker 4

Okay. So I think there are like four questions in there. So the PPP loans, cash deposits, those have already started running off. I mean, if you compare the amount of loans versus what we identified as the deposits, which were about $200,000,000 we expect that to continue to run off and probably into the third, maybe trickling into the fourth quarter, but expecting it to run off in the third quarter. In terms of the margin for the investment portfolio, the reinvestment yield is roughly about 1%.

I mean, the kind of securities that we're buying, so roughly 1%. And then the kind of where it would bottom out, it would take a while for it to bottom out. But I would say maybe a year for it to hit kind of a lower level.

Speaker 5

Okay. Very good. Thanks for taking Sorry, go ahead.

Speaker 4

I was just going to ask if there were other questions that you had that

Speaker 5

No, there was a bunch in there. All right, I'll step back. Thanks, guys.

Speaker 2

Thanks, Casey.

Speaker 0

Thank you. Our next question comes from Ebrahim Poonawala with Bank of America Securities. Please go ahead.

Speaker 6

I just wanted to follow-up on the margin, Deane. I guess if you go back last quarter, I think at the time, again, recognizing there's a lot of volatility, but I think your guidance was one to two basis points of margin compression looking out. As you look at what happened in the margin in second quarter, close to mid-270s with extra interest accrual recovery. And when I look at your guidance for the third quarter, just talk to us in terms of has anything changed in terms of what you were thinking about asset yields back in April versus today? Or is all of this attributable just to the excess liquidity that you received because of deposit growth and PPP?

Speaker 4

So the what happened was we had not expected the LIBOR rates, so the short end, to come down as much as it did over the quarter. We expected that to drift lower throughout the rest of the year. So that came about seventy, eighty basis points in the quarter. So that changed the results quite a bit. In terms of the liquidity, that did impact us.

About half of the drop was due to liquidity in additional deposits. We're looking at so the guidance that I provided, six to seven kind of on a normalized basis, does take into account some further reductions due to rate and then some additional from the liquidity side. Some buildup. Some buildup of liquidity. Yeah.

Speaker 6

Got it. So and I guess and and that that does include PPP without any could you remind us what the PPP fees are outstanding? If we assume all of this comes back, how much is PPP fees remaining at the end of the second quarter?

Speaker 4

Well so our my my forecast assumes that we don't see any Prepay. Prepayments, and therefore, we do not, accelerate the recognition of the fees. Sure. So so that that's all built into that forecast.

Speaker 6

Understood. I was just asking if the total origination fees were that's what I'm standing, but I can follow-up later. Just as a separate question, Peter, if we can or we can just talk about the deferral trends comparing $1,900,000,000 at the end of or I guess, end of second quarter versus $1,100,000,000 when you reported 1Q results. Just talk to us that you provided some good color around the characteristics of these borrowers. But when we think about the customer deferral trends, your peer provided some stats around how many of them went back to paying status over the last few months.

Just give it a give us a sense about what you think will happen in terms of the commercial borrowers going back paying, and do we need a full fledged reopening of tourism and the economy in order to get there?

Speaker 2

Let me ask Mary to start and I can chime in. Mary?

Speaker 3

Sure. In our approach to providing relief to the customers, we really took advantage of the CARES Act, which allowed us to be very flexible in what we were doing. And so, we provided six months of relief that aligned with what the GSEs were doing. As we've noted, 92% of our commercial, deferral customers are making their payments and 49% on consumer. And in our discussions with them, it appears that many did take it strictly as a precautionary measure and, an ability to really build some liquidity during the period.

I think, the majority of ours are secured and, so clearly working with them should they need to continue to have some sort of relief would be very manageable.

Speaker 2

Yeah. Ebrahim, I guess the the only thing I would add there is, I think that the deferral activity is maybe not a great, indicator of future economic health or or or credit consequence because of what Mary just described, which is a lot of, frankly, reasonably healthy borrowers. I think out of a fit of conservatism and understandably so, chose to chose to ask and were granted some form deferral. Probably the more interesting space is in the criticized segment, which is where, you know, at least from our standpoint, we're driving that more from the standpoint of understanding what the base liquidity level is of our, borrowers moving forward. And and with the view that, gee, this this could take this whole thing could take a year plus to resolve.

And to the extent that they have, the kind of capital and and liquidity to support that, that obviously was one form of rating and if not, another form of rating.

Speaker 6

Got it. And and that makes sense, Peter. So and then just to that, if I can ask one last question. Just when we think about the resiliency of the Hawaiian economy, like, if tourism fails to open over the next few months in any meaningful way, just talk to us in terms of, one, the ability of the economy, the local government to withstand that pain. And is there a break point where you think where a lot of these borrowers who have the liquidity, maybe you can manage to another three months in in in a lockdown mode where things start sort of, like, falling off a cliff, like something that you would worry about in terms of duration?

Speaker 2

Well, you you asked a lot of items there. The well, I I think that the the the easiest data point to to point to is the kind of the the delta in unemployment from early pandemic to kind of mid pandemic dropped pretty substantially. And that was a result of the partial reopening. So moving from a shelter in place to a partial reopening without any visitors into the islands, number one. And number two, you know, kind of the effects of PPP and stimulus checks and UI plus ups and the like.

So, I think our ability to withstand the crisis net of, bringing visitors in, but with some form of federal stimulus might be a little bit north of what kind of what we experienced in the April, May to June time frame. But you're right, I think for the economy to get back on a full footing will require a resumption of visitor inflow. And I would I hesitate a little bit to think too much of that as a state of Hawaii issue. Because, you know, irrespective of whether the state decides to amend its quarantine rule or not, I think the real issue is what's happening, you know, nationally and somewhat globally from an infection standpoint. And that probably has a bigger factor in driving more of the demand side of the equation.

And I just think as long as we're in this uptick mode nationally, you know, the outlook for the visitor industry is not terribly buoyant. And to the extent that we can as a nation get that back under control, I think things kind of take over from there. As it relates to your question on the resiliency of the state of Huego, the state actually has a relatively high credit rating relative to the other 49 states. And and we'll just have to see like like every other municipality. But as of right now, there there there you know, is in a sense that that things will be shutting down imminently.

Speaker 6

Got it. I know that was a lot. Thanks. Appreciate the color. Thank you.

Yep.

Speaker 0

Thank you. Our next question comes from Jeff Rulis with D. A. Davidson. Please go ahead.

Speaker 7

Thanks. Good morning.

Speaker 8

Hey, Jeff. A couple of questions on the, maybe on the noninterest income. Dean, appreciate the guidance there, but wanted to, dig a little deeper in the the the Visa position. Can I is is that gone at this point?

Speaker 2

Yes.

Speaker 8

Yes. Okay. And then the I guess that I assume that I think that had an associated kind of carry cost to it. Is that barring other investment securities gains losses, that's more of a neutral event going forward?

Speaker 4

No. The shares that we sold were ones that we just held on our balance sheet. So what's represented now in the income statement is the previous sales. So do still have that swap in place.

Speaker 2

There's because they're still Class B.

Speaker 4

Yes. Class B. Yes. So when the when the shares convert, that will go away.

Speaker 8

I see. Okay. Thank you. And then on the service charge, again, I guess baked into your guidance is a little lower run rate, but wanted to kind of see how that maybe progressed or sort of built through the quarter. I don't know if there was some April was pretty void of any activity, and then it slowly began to perk up.

And I guess more to Peter is the strategy there. When I don't know if there were fee waivers, but when is the appropriate time to kind of bring that back in? And when do you kind of get back to some level of some of that's activity driven by the consumer, but wanted to see if there's anything on your end that the pace of that build going forward? Thanks. Yes.

Speaker 2

It's a good question, Jeff. So q one to q two, we saw about a 6 and a half million dollar reduction in in those sorts of fees. Okay? And so that would be OD, that would be, FX, that would be ATM. You know Merchant.

Merchant merchant services. You get you you kind of the very transactional debit interchange. And so as a baseline, I would probably subtract that number out moving forward. And then you're right. I think that as the state and that and and those numbers kind of generally reflect a pretty draconian stay at home posture from an economic activity standpoint.

So you're right. As the quarter progressed and as the economy opened up a bit, we did see some levitation in those levels. That was driven by volume levels increasing. And we actually, as of 06/30, have reinstituted our ATM fees, which is which is actually the only fee that that we waived during that period. So, you know, some fees will float up, some not so much like foreign exchange probably won't move up until we start getting foreign visitors back into the marketplace.

But I think it's reasonable to think that, you know, that 6 and a half million dollar downward delta could could replenish just in the current state, maybe by a third, I'd call it, something like that.

Speaker 9

Great.

Speaker 7

Is that helpful? Okay.

Speaker 8

Yeah. That is. That's that's perfect. And then maybe just last one on for Mary. The the MPA additions in the quarter, any comment on, were those pre COVID stressed or just the makeup of of what came in?

Speaker 3

It was, one residential loan, that actually was having challenges pre COVID. We have entered into a repayment plan, and it should go back on accrual in the 2021.

Speaker 8

Great. Thank you. Thank

Speaker 0

you. And our next question comes from Andrew Lies with Piper Sandler. Please go ahead.

Speaker 7

Hi, good morning, everyone.

Speaker 2

Hi, Andrew.

Speaker 7

Hi. So just a question just revolving around the provisioning going forward. And just how much of the provision is driven by the UHERO unemployment rate forecast? Because we saw the nice drop here in June. If that continues and if it levels out here or trends lower below what their latest forecast is, how should we look at the provisioning going forward if the unemployment rate does appear to be below what they're forecasting?

Speaker 3

Well, we did base it on your hero, so it is driven off that. We did have a bias too for the uncertainty in that recovery. So, I wouldn't expect that we'd need to continue to build the reserve at the same level moving forward. Although, of course, in this unprecedented period, we want to continue to build reserves. It's prudent.

Speaker 2

Yes. So Andrew, emphasize that the reduction in to 13.9%, I guess, somewhat into our provisioning. But because UHERO actually didn't revise their Q3 and Q4 unemployment estimate, which were kind of back in the 20% range. That's really what's baked into our provisioning. And I guess I would say as we think forward to future provisioning, my sentiment is that our unemployment, if you want to use that as kind of a guideline, 13.9 feels like a little bit of an overreaction to the downside.

And likely, we'll probably see unemployment levels in between that 13.9 and that 24 ish number in the earlier months. So I don't think that the end of provisioning is in store for us anytime soon. Although, I guess I would say that Q2 was probably a pretty meaningful number for us.

Speaker 7

Okay. Thank you. That's really helpful. And then just on operating expenses, it seems like some of those were lower just with fewer transactions, less customer activity. So how much, I guess, activity would that need to increase for expenses to get back to maybe the run rate that you were at like a year or so ago?

Heard your comments about in response to Jeff about maybe some of those transactions going back by about a third. But do we need to have tourism come back fully for a higher run rate of expenses or can we stay below $90,000,000 for the foreseeable future?

Speaker 4

Yes, it did. The level of transactions did impact the expenses. It's I wouldn't say it's going to be a very material increase as the transactions do come back. But it'll probably drift closer to $90,000,000 if we get something above 50% kind of return kind of economic activity on the fee side. So some increase, but not much.

Speaker 8

Thanks. That's very helpful. Yeah.

Speaker 2

Andrew, think the expense side is going to be kind of that upward or downward the upward delta, I'll call it, is gonna be driven more by our provisioning activity versus economic activity. The economic activity, as you point out, has some impact, but it's it's pretty small. It's like a million bucks or something. Yeah. Yeah.

It's really Okay.

Speaker 7

So it's really

Speaker 8

it's really

Speaker 7

provide them and then okay. So it's really just the the provision and, like, and just the accruals that way maybe through salaries and benefits that have the bigger effect on on expenses?

Speaker 2

Yes. It's really variable comp, but yes, that's right. Our

Speaker 0

next question is from Jackie Bohlen with KBW.

Speaker 6

Hi, Jackie.

Speaker 10

Dean, I was wondering if how did premium amortization behave between this quarter and last quarter?

Speaker 4

So it did go up by, I believe, 300,000.0 to about $7,500,000 So it did increase quite a bit

Speaker 10

on a

Speaker 4

percentage basis. That's reflective of just the market. With mortgage rates being where they are, there's a lot of refi activity.

Speaker 10

Okay. And what are you assuming next quarter in the margin guidance you provided?

Speaker 4

In terms of premium, Am? I don't have exactly what we we factored in, but it is, assuming a higher premium, ma'am, for the quarter.

Speaker 10

That's all I needed. Just a ballpark and kind of what you were thinking in that. Okay. Thank you. Then this one, Peter, it's probably for you.

I'm just wondering if you could provide an update on kind of where you're standing in terms of longer term reinvestments, you know, that you've been doing, if any of that has been paused, if any of it is going ahead, and also how customer behavior and, you know, you gave great statistics on digital adoption. How that might be impacting any future efficiency projects you have in the works?

Speaker 2

Yeah. So, I guess I would say, Jackie, that, the the situation with COVID has, in some ways accelerated a lot of the direction that we were heading in anyway. So as you know, we've we've made a lot of investment to date in in our digital platforms, and continue to do so. And and I think we'll continue to do so simply because, you know, they they generate return for us. So they either generate more revenue or they they help us bring down, you know, make things more efficient.

So I wanted at this point, fortunately, we got most of the fat end of the the investment curve in already from an investment standpoint. We do have some, you know, kind of tangential investments to make. We have some larger decisions to make, call it a year plus out, hopefully outside of this horizon. But ultimately, the idea is that we generate more revenue there, so that's a positive. And that probably doesn't get in the way of our investment making decision even in this environment.

As it relates to footprint, which I think is what you're probably driving towards, you know, pre pandemic, we were at 68 branches. We skinny that down to 31 into the teeth of the the pandemic, and now we've widened out back to about 40. And and we're gonna, you know, we're gonna we're gonna see what happens moving forward from a customer transaction standpoint, you know, in in the branches because we've seen that activity fall pretty precipitously. Our guess is that once things go back to normal, that will result in some upward shift in visitor traffic back to the branches. But I think that there's probably a fair number of folks who now that they've been exposed to our digital capabilities probably remain digital customers.

So I don't think I don't think that the numbers bounce back to pre pandemic levels, and that that obviously creates some efficiency opportunities for us down the path.

Speaker 10

Okay. So I would guess that, you know, the evaluation of that, assuming we have resolution on the virus, could be put in with some of the larger decisions you were talking out about in about a year or so?

Speaker 2

Yeah. Yeah. I mean, I think they're those are always ongoing conversations. But, yeah, I think I think we won't really know what the true transaction volumes will look like in our branches until we get to some more normal state of activity.

Speaker 10

Okay. Makes sense. Great. Thank you for all the detail. I appreciate it.

Thank

Speaker 0

you so much. Our next question is from Laurie Hunsicker with Compass Point. Please go ahead.

Speaker 9

Hi. Good morning.

Speaker 2

Good morning.

Speaker 9

Dean, I wondered if we could just go back to the margin guidance that you were giving of down six to seven basis points next quarter, were you doing that off of the headline NIM of two eighty three, or were you backing out the interest recovery book? So, you know, coming off of a February or two seventy six margin.

Speaker 4

Yeah. So I I I it was off of the adjusted. So it would you know, if you kinda did the calculation, it puts us at about a 2.7% margin.

Speaker 9

Perfect. Okay. Perfect. Okay. And then the other question that I had was and and I appreciate that you're not including any of the PPP fees, forgiveness fees in your margin.

But of your 562,000,000, what are the total fees that you expect over the life of those loans?

Speaker 4

In total, it's a it's about $36,000,000

Speaker 9

Okay. That's great. And then, Mary, just a question for you. Office exposure, where do you guys stand? And do you have an LTV on that?

Speaker 3

I do. It's 12% of our total commercial mortgage book, and the weighted average LTV is 59.

Speaker 9

Okay. Great. And then same question on leverage loans. Do you have a dollar amount? And then also maybe help us think about how much of that is GovCon, government contract?

Speaker 3

We have $54,000,000 in leverage exposure. It's 3% of our total C and I. 26% is essential I mean, sorry, 74% is kind of essential businesses. I don't think any is really related to government contracts.

Speaker 9

Okay. Okay. That's helpful. And then, I guess, just kind of going back, maybe, Peter, this is more a question for you. Can you help us think about what your target is for your your reserves to loan?

Speaker 2

Well, we don't we don't actually target. We don't so that would be kind of different from how we set the reserves. So the reserve actually you know, it's really a function of what's the reserve requirement that creates your allocation, your provision. And that's really not targeted as much as it is a calculation around what we're seeing environmentally. So, you know, obviously, it's a function of what is our what are the markets that we lend money into look like?

What are the reasonable and supportable prospects moving forward, you know, within a one year time frame against what's the intrinsic quality of our loan portfolio. And so, you know, actually, we're we're fortunate in that we we have a lower risk asset profile as a percentage of total earning asset than most banks, which gives us a little bit of intrinsic advantage in terms of being able to, you know, afford the provision and and other things that earning support, if you will.

Speaker 9

Okay. I mean, I I again, just looking at this, so looking at your reserves ex the PPP, you're at one fifty three, one fifty four, something like that. I mean, you had a huge gain visa gain this quarter. If we looked at your loan loss provision of 40,400,000.0, if you hadn't had that that visa gain, would you have thought about that number differently? I mean, I realized there's, you know, there's there's some some softness in terms of there's massive unknowns.

Right? And so I'm just trying to understand directionally as as you said, look. Maybe it comes down. Obviously, appreciate there's a lot of unknowns. I'm just trying to think about how much maybe the Visa game played in or how just even even directionally how you're thinking about where you're comfortable with that number.

Yeah. Maybe I'm asking this question twice, but yeah. Thanks.

Speaker 2

Yeah. No. So the the the kind of the the first the answer to the first question is no. Our provisioning and our reserving really didn't have anything to do with our decision to either take or not take the Visa gain. That was a that's investment that we've had for many, many years and actually have been in the process of selling portions of that investment for years now.

The on the from a provisioning standpoint, I guess what I would say is that, you know, these are uncertain times. And and so there's a certain level of of inaccuracy that's just built into everyone's provisioning that for those companies that have the ability, the earning capacity to provision in a healthy way, think that's probably a smart thing to do. So you saw that in the quarter. It was a large number, and it was not necessarily a number wasn't it wasn't a number driven by any potential earning outcome whatsoever, really. It's kind of a separate analysis.

Speaker 9

Okay. Great. Thanks. I'll leave it there.

Speaker 8

Thank

Speaker 0

you. And I'm not showing any further questions in the queue. I would like to turn the call back to Cindy Wyrick for any final remarks.

Speaker 1

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

Speaker 0

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.