Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Bank of Hawaii Corporation first quarter 2020 earnings Conference call. At this time, all participant lines arent in listen only mode.
The speakers presentation, there will be a question and answer session.
A question during the session you when either press Star then one on your telephone.
Please be advised of today's conference is being recorded if you acquire any further assistance. Please press Star then zero.
I would now like the hand, the conference over to your Speaker today, Cindy why Wright director of Investor Relations. Please go ahead.
Thank you Sarah and good morning. Good afternoon, everyone. Thank you for joining us today as we discussed the first quarter of 2020 on the call with me today is our chairman President and CEO, Peter Ho, Our Chief Financial Officer, Ding should get Mora, and our Chief risk Officer, Mary Sellers before we get started not 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 at the actual results may differ materially from those projected during the call. This morning, we'll be referencing a slide presentation that was included with our press release. This morning, a copy of this presentation in the release are available on our website be a wage dot com.
Under the Investor Relations link and now we'd like to turn the call over to Peter Ho.
She city Hello, everyone Mahalo for joining us today.
We hope this call finds you your family and your colleagues in good health and in good stead.
Given the depth and breadth of the covert 19 crisis, we thought we'd break from the longstanding format of earnings call.
We'll still cover Q1's results.
Yes that commentary somewhat in place it subsequent to some commentary around the Covidien 18 supplement would you received as part of our press release today.
The supplement is intended to share with you how Hawaii has been impacted how bank of ways prepared for the covert 19 crisis.
Our operating and performing through the crisis, and how our liquidity right. It capital position stack up so the challenge at hand.
I'll begin by giving a broader overview deal will fall to discuss liquidity Barry will discuss our credit metrics and Dean will conclude with some thoughts on capital well then spend a brief amount of time on tier one and then we'd be happy to answer whatever questions White house.
So I wouldn't be again on the supplemental pocket beginning on page two a with the overview.
And basically fundamentally we view covert 19.
As a multifaceted crisis of course, it's a health crisis and that is certainly an economic crisis.
But it is also a social crisis and even an ethical crisis.
Given this we believe long term value will accrued affirms committed the balancing the needs of all stakeholders customers employees shareholders vendors and the community at large through this crisis.
Without question boys faces substance of short term and mid term challenges over the long term attractiveness of Hawaii as a place to live as a place to visit and that's a strategic military branches point remains unchanged and intact.
Our liquidity credit posture and capital base positioned us well.
Our 123 year history, serving or island community has prepared us well to deal with nature setbacks as we have many times, that's a sport our committees and their time of need.
Now, let me turn to page.
Three of the deck.
This will give you a sense for the inspection activities here in the Hawaii market and I think the bottom line is we've been a relatively fortunate compared to some less fortunate parts of the country World.
As of yesterday, we had six additional cases reported bringing our total to date to 580 cases reported here in the state of way. Unfortunately, we've had 10 deaths result, as result of covered 19.
If you look at the Upper left chart on page three you'll see that the actions taken.
By the.
The Governor's office and the Mayor's office and third week of March seemed to have done the trick in terms of flattening the curve and you'll see by looking at the chart on the bottom right. That's a number of new cases by day seems to be coming down at least for now.
You go to slide for a this gives you a sense for our response timeline.
And for whatever reason, we just identified.
Situation.
It's something that we really needed to to wrap our arms around to determine whether there was in fact, a clear and present danger represented by this virus at the time coming out of China.
By February 3rd we've convinced ourselves that indeed, there was and that set off a pretty large purchase on our part of both pp in sanitation products.
Kind of through this early mid March period, we were in active discussions with our board of directors and our committee chairs talking about.
Scenarios talking about options that we might take in the event at this time.
Time Corona virus situation, there to be called the coven 19 situation accelerated.
By March 10th we had a strategic implementation plan in place and we're ready to roll that out.
318, or a week prior to the stay at home order by the city.
We made the decision to transition bank of Hawaii in all areas, where we could do a work from home.
Format.
And then you see on March 25th two days after work from home order went into place.
We took down our branches in a pretty meaningful way.
If you go to slide five just to give you a sense for the primary objectives of our strategic implementation plan for Cobot 19.
Really three pronged headlines of course by the safety of our employees being absolute Paramount to Oliver activities.
Clearly, we're committed to providing for the essential needs of our customers that are community and then thirdly, we recognize as an essential provider that we'd are providing services to other.
Central providers, as well and we need to be able to be solutioning, a robust plan on their behalf as they continue to do their good work within our community.
On the slide six operationally, we as I mentioned brought the branch structure down from 68 branches through our entire way into one specific that work down to 31 branches. This is still providing us coverage in all our markets even in our smallest markets.
Here at the headquarters building, we brought our personnel count down from 1300 people in the headquarters to about 250, so thats, an 80% reduction did that.
Mid March.
We also set up.
A number of teams and locations sites to perform certain.
Forms of operational functions.
The reason to do that obviously to create some redundancy in the event that we have.
Situation subsequent.
So to give you an overview of how the workforce is conformed right now for bank boy approximately 60% of our workforce is working from home quite effectively I might add 25% ever workforce is working on site and 15% of our workforce is awaiting activation.
From an employee standpoint on slide seven.
A number of programs implemented.
As a result of this crisis.
Our unplanned employees, the 250 employees that I mentioned to earlier.
So the 500 plays I'm, sorry that I mentioned to you earlier each receive a monthly stipend of $500 to help support incidentals part time employees earn $250 per month.
We have very tight process around coven 19 incident management really do that in conjunction with a terrific team of medical industrial cleaning professionals that we've retained on an advisory basis.
Just today, we launched a web based employee morale and engagement tool to give us a better sense for how our team is doing out there its first throughout our marketplaces and I'm excited to get the feedback on that and see how that might help us improve engagement even further.
For our onsite employees, we made sure that we had surplus sick leave available to ensure that people.
We're not being incented to come to work that they didn't feel anything other than 100% ready to go physically and emotionally.
And then finally, our executive team is participating in a twice daily video conference. One early in the morning in one later in the afternoon just to ensure that we're all in the same pages, we stepped through the situation.
Stepping to slide eight talk little bit about our commitment to our customers.
Fundamentally we're committed to providing full service basin capabilities via our albeit revised physical layout, our work from home workforce and bringing the full force of our digital capabilities forward. We've invested a good amount of time and effort and money into our digital offers.
Things over the past several years and I'm pleased to say that we're beginning to see the real benefits of that situation like this.
Payment relief is being provided to both consumer and commercial customers who are asking for it.
I'm proud to say, we processed over 2100, PPP loans totaling in excess of $525 million, we had upwards of 10% of our total workforce supporting this effort.
Last week on the 15th we electronically distributed 65000 stimulants payments totaling $112 billion to our customers as you can imagine that hot caused quite a ripple effect through many of our operations.
Then finally, we're committed to exploring emerging loan products like the federal reserves based mainstreet loan program as well as potentially our own.
Emerging consumer products.
Page nine.
Just to give you a sense for modifications a total of 5200 modifications made to date.
That's both commercial as well as consumer totaling 9.8% of our loan Outstandings.
On page 10, just a sense for what we're doing in the community I think headlined by.
Bank of voice foundations $3 million donation to the Hawaii community Foundation to support whole Koyie co bid 19 activities.
We also fairly early on donated 1200.
And 95, respirators, which we had ordered early on and then realize that those respirators will probably better placed elsewhere.
And that additional we've provided does an additional $800000 and finance work for additional PPD, we waived ATM fees at least through June as we brought down the branch structure and the we've held for the United line staff with broader authority to waive account fees.
So as for an economic impact on page 11.
I think we all would except that this is an unprecedented situation and really what is what is fascinating to me is this is indeed I think historic and that this is the first time the country has an effect pushed itself into a recession in this case to stave off.
A novel virus and tried to protect and save as many people as possible, which I think is exactly the right thing to do that come with obviously its economic consequences.
But it's also the first time that our country has implemented masses fiscal and monetary stimulus on the front end of recession will be very interesting to see how this plays out as for Hawaii. We are in fact impacted like every other state in the country by the so.
Ultra and plays work from home stay at home.
Policies in place that's impacting our local economy greatly a little bit differently from some other places is that as a visitor destination. We're also being impacted by the self imposed 14 day quarantine rule, which has brought tourism here in the state to virtually a standstill.
So if you turn to page 12. This is a snapshot of the Hawaiian economy. This is per Euro 2019 data and you see that the leisure and hospitality industry is a big player in Hawaii, they represent 19% of total jobs in our marketplace.
If we go to the GDP proportionality.
Leisure hospitality dips a bit to 10%, but still a meaningful element and then down into the personal income line dips again to 11%, but still a meaningful component of of our of our marketplace. Fortunately government and defense spending is.
Equally in some instances a larger proportion of our economy and for now those pieces feel pretty stable.
Turning to page 13.
Here you see the economic forecast by you here on this.
Came out at the end of March the March 30, Onest 2020, and what you see is a call for unemployment spike for the year 2020 of 13.7% what I think is embedded in there is likely and unemployment rate for this second quarter of in excess of too.
85% and then a feathering down from there over the course of the year.
Turning to page 14.
You will see just other forecast data.
On the left side you see in the dark Blue real GDP estimates down 7.7%.
For the year 2020 forecast.
Personal income levels down.
Little bit more muted at minus 2.6%.
On slide 15, we've we've tabled for you the anticipated federal released spend to our marketplace $6 billion.
Boards and $16 billion headlined by the Paycheck protection program.
Which I'm proud to say the way banks I think that it's terrific job and delivering just over $2 billion to our marketplace through this program.
So I'll finish off my piece by.
I think stating the obvious covered 19 is substantial it's unprecedented but we believe bank Boise is in fact, well positioned we have a seasoned management team I can tell you. The four of US represented in this room have worked together for more than 20 years. So were veterans of 911 or veterans of the financial crime.
Basis, and now we'll through this viral situation.
Great liquidity conservative loan portfolio strong capital levels, and perhaps most importantly, a preeminent market position.
So now let me turn the call over to dealers to talk about liquidity.
Thanks Peter.
On slide 17.
Liquidity remains strong supported by a conservative investment portfolio in a solid deposit base.
The high quality composition of our investment portfolio, which represents approximately 30% of total assets as a source of stored liquidity.
Our deposits consisting of an exceptional core deposit base supports a low loan to deposit ratio.
And we also maintained the deposit cost advantage relative to our national in Hawaii peers.
Slide 18 is a de composition of our investment portfolio.
The conservative constructs of our investment portfolio enhances our liquidity.
94% of our investment Securities, our AAA rated and 100% a minimum de rated.
This results in a portfolio that is highly liquid and can easily be utilized to secure additional funding.
In addition, the government and agency securities provide secure and reliable monthly payments for continued balance sheet funding.
In 2019, the average monthly cash flow was greater than the $100 million.
Our strong deposit mix as shown on slide 19.
Our deposit base is characterized by solid mix of customers and core deposit accounts and result in low cost and stable funding.
Over 90%.
Balances are from core consumer and commercial customers.
And nearly 90%.
Deposit balances, our core checking and savings accounts.
Our loan to deposit ratio shown on slide 20 is low, especially when compared to peers.
Our long history of the relatively low Rachel is driven by our strong and stable deposit base.
And the low ratio provides added balance sheet flexibility to accommodate ample asset funding opportunity.
Slide 21 shows our deposit growth and deposit cost advantage history.
We've grown our deposits through a number of different economic environments, while maintaining our low cost advantage, both significantly contributing to our profitability.
Now I'll turn it over to Mary Thank you deem.
Beginning on slide.
22.
And can really has three fundamental tenants. The guide how we approach lending. We believe that these have proven to provide it would provide us with a superior portfolio construction and performance outcome, allowing us to support our customers and community through difficult economic times.
First we lend to customers we know.
Second we lend to markets, we understand and third Wieland communities We trust.
These underpinning coupled with conservative underwriting and disciplined portfolio management results in a portfolio that's diversified by CAD category.
Portfolio with appropriately sized exposure a portfolio that is 73% secured by quality real estate with a combined weighted average loan to value at 57%.
And higher risk categories that are well contained.
Moving to slide 23, beginning with our geographic footprint, 92% of our portfolio is away based with six person in the west specific and 2% on the mainland.
Mainland exposure represents credit extended to our customers who have diversified assets were operations beyond to wait.
On the next slide please.
We highlight how knowing our customers comes from the length of relationships, we've enjoyed with them.
57% of consumer borrowers and 60% of commercial borrowers have had relationships with the bank for 10 or more years.
On slide 25 granularity.
We take a disciplined approach to managing our exposure limits and this results in a granular commercial portfolio, 93% of loans are under 30 million why 72% of loans are under 15.
Stepping to slide 26, our loan portfolio totaled 11.4 billion and reflective of our island economies is 60% consumer and 40% commercial with 75% secured with quality real estate.
Moving to slide 27.
TLC consumer portfolio.
The consumer portfolio totaled 6.8 billion with 83% secured by what margin for let's say.
The largest segment residential mortgage as 0.2 precision of Outstandings with a monitoring psycho less than 700, and a loan to values greater than 80.
In the home equity portfolio, 3.3%, Outstandings have a monitoring cycle or less than 700, and a loan to value greater than 80.
Our indirect portfolio, which is 10% of the consumer but has 4.2% of outstanding with apply to less than 700 entity T greater than 45%.
The balance of the consumer portfolio is primarily comprised of the direct installment loans with 1.1%, having a monitoring score in less than 700, and currently 30 days or more past due.
Moving to slide 28, and our commercial portfolio.
58% of the portfolio is comprised predominantly of Hawaii real estate with strong sponsorship in equity 90% of the portfolio has a loan to value of less than or equal to 75% criticized exposure is 4%.
See an ice segment is season, two way centric and non levered.
1.3% of Outstandings are leveraging criticized.
The construction segment.
It was 5% has 61% weighted LTV and is concentrated in low income or workforce housing.
And our leasing portfolio is 2%.
With granular way leases accounting for 61%.
37% his legacy national large ticket leases all for investment grade ramp companies.
Turning now to slide 29, as Peter commented earlier lay in specific markets have been impacted by the coping 19 event.
The number of industries, particularly retail lodging and restaurant and entertainment related facing the greatest challenge in our portfolio.
Exposure to these industries represent 11 pretty represents 11% of total outstandings.
Moving to slide 30.
Retail exposure is 5% of total loans, 88% is secured by real estate with a 52% weighted average loan to value.
Only 4.2% as a portfolio is either unsecured.
We're not an essential business.
Turning to slide 31.
Lodging represents 5% of total loans, 71% is real estate secured 84% has a loan to value of less than or equal to 65% and 95% of unsecured outstandings are to global hotel and timeshare brands that maintain significant deposit.
And ancillary business with us.
And then finally on slide 32, finishing with the restaurant and entertainment segment.
This represents 1% of total loans, 39% is secured with real estate with a weighted average loan to value at 63% criticized exposure is 6%, 52%, which is secured with real estate.
I'll now turn the call Justine.
Thanks Mary.
Turning to slide 33, we maintained strong capital levels that are substantially above well capitalized minimums.
The capital structure is simple all common equity with no preferred securities or other forms of hybrid capital.
In addition, we have a long demonstrated that strong history of dividends.
As shown on slide 34, we maintain our capital levels well in excess of minimums required.
Our common equity tier one capital ratio is nearly twice the well capitalized minimal.
Our strong capital position is further supported by our comparatively low level of risk assets.
Slide 35.
We have a long an unbroken history of dividends.
Bank of Hawaii was one of the few banks that maintain and paid a dividend throughout the financial crisis.
And our board declared a dividend 67 cents per share for the second quarter 2020.
Now I'll turn it back over to Peter.
Okay. So that that's concludes the coded 19 supplement happy to answer your questions, but before we do that we thought we'd give you.
So some cursory thoughts on how Q1, one which actually.
Prior to the viral situation trending toward pretty good Alco [laughter], Dan you want to touch on that sure.
Net income for the first quarter was $34.7 million or 87 cents per share.
Our return on assets was 0.77%.
Return on equity was 10.64% in our efficiency ratio was 55.96%.
Our net interest margin in the first quarter was 2.96% up one basis point from the fourth quarter down 16 basis points for the first quarter of 2019.
Net interest income on a reported basis in the quarter was $126 million up 2.1 million from the previous quarter and up 1.1 million for the first quarter last year.
For the second quarter of 2020, we expect our net interest margin will be about one to two basis points lower than the first quarter.
As Mary will discuss later, we recorded a credit provision of $33.6 million this quarter.
Noninterest income totaled $46.1 million into first quarter of 2020.
Down 1.6 million from the previous quarter and up 2.4 million from the first quarter last year.
Noninterest income in the previous quarter included a gain of $3.8 million related to an early buyout of the leveraged lease and noninterest income into first quarter last year included 1.4 million dollar commission related to insurance products.
Adjusted for these items, the increase compared with the fourth quarter and first quarter last year.
Were largely due to significant growth in customer derivative activity.
Strong mortgage banking revenues during the fourth during the first quarter was partially offset by an impairment of the mortgage servicing portfolio.
For the second quarter of 2020, we expect noninterest revenues to decline due to lower levels of customer derivative activity and certain fee waivers that we are offering through June in order to assist our customers during the call. Good 19 pandemic.
Noninterest expenses in the first quarter totaled $96.3 million, an increase of 3.2 million from the previous quarter and from the same quarter last year.
Noninterest expense for the first quarter of 2020 included seasonal payroll expenses of approximately $3.1 million and severance expenses of 4.7 million that were partially offset by elimination of corporate incentive accruals.
There were no significant items during the fourth quarter of 2019.
The first quarter of 2019 included seasonal payroll expenses of approximately $2.7 million.
The second quarter 2020, we expect our total noninterest expenses will be lower by approximately 10% and the first quarter.
Our investment portfolio increased to $5.7 billion the duration of the portfolio was 2.8 years at the end of March and premium amortization during the quarter was 6.2 million.
During the first quarter, we repurchased 166400 shares of common stock for a total of $14 million.
Due to the uncertainty related to Kobin nine the cobot 19 endemic we suspended the share repurchase program in March.
Our shareholders' equity was 1.33 bill enough to ended the first quarter, our tier one capital ratio was 11.85% and our tier one leverage ratio was 7.14%.
Now I'll turn the call over to Mary Thank you deem.
Based upon the Cecil standard the allowance for credit loss was not net.
130.2 million asset the ended the first quarter, a 29.8 million dollar increase from our January one 2020 implementation date and 20.2 million increase from December 31 2018.
Given net charge offs of 3.7 million a provision of 33.6 million was recorded.
The increase in the allowance this reflected of management's best estimate incurred losses over the life of our portfolio loans in our portfolio given the company's credit risk profile, the economic outlook and forecast for our market with the changing global pandemic as well as the unprecedented.
Front end intervention with fiscal and monetary and regulatory program.
The first quarters estimate was anchored on new Heroes March 31, 2020, forecasts, which estimated to play will realize 13.7% unemployment for the full year 2020 with job loss, peaking at the end of the second quarter, followed by a very gradual reopening of the economy.
Through the latter part of the year.
The bank Cecil methodology reflects updated portfolio segmentation and use of the company's net charge off experience through the great recession.
Ratio of the allowance for credit losses to total loans and leases was 1.22% at March 31, compared with 0.99% at January 120, 21% at December 31 2019.
The reserve for unfunded commitments was 3.3 million for the first quarter compared with 3.5 million at January one and 6.8 million at December 31st 2019.
Thanks Barry.
So I know we took a fair amount of time. This morning, but we thought it was important to not only update you on the quarter's results, but also.
Just what's been happening out here and with bank of Hawaii, and the covert 19 crisis. So thank you for your interest in bank for we'd be happy to answer your questions at this time.
Thank you as a reminder to ask a question you would need to press Star then one on your telephone to withdraw your question. Please press the pound King please stand by what we compile the culinary roster.
Our first question comes from the line of Ebrahim Poonawala.
Bank of America. Your line is now open.
Thank you.
Good morning, Peter.
Good morning.
Well I guess.
Well, thank you very much while the detailed in the slide disclosure is very helpful.
I guess just in terms of for not true so from a sales.
How do we think about still a bit and so bid when you look at though there's always going from 1% to onetwenty tool.
If you can talk to us and domes off that means when I look at the forecast that you provided no macro forecast seemed like a pretty decent bounced back next year is whats baked in is that kind of what's the underlying expectations that on how things play out and we start to get close to normal towards the end of the out into next year.
Dr will just what the assumptions when tool because it doesn't mean it this is I too long, but when they come good as does today versus what happened in the good financial crisis. When does so be sure when from the quantity. It too I think to 76 almost doubled over a period of two years.
Like should we just see a gradual increase and to build on do there's more clarity to the magnitude that you sold one Q.
Oh, Yes, Abraham I think thats very reasonable.
Do you expect of course, we would as noted expect to reserve build if this continues and the magnitude of that would really to be dependent on what we see into the next quarter.
And so your forecast today is based on slide 14, when things kind of bounce back if that's what informed us pieces of is that accurate yes.
Yes that is.
Yeah, but it's actually knew that.
We did mute the.
Recovery down a bit from what the you hear a forecast was going into 2012, I always sensitized, the reemergence a bit but but probably.
Directionally correct that's right.
Got it so.
Yes, Doug fitness I guess, the conclusion that theater and thought about penetrate no for the bank so sorry.
Along with it but is it safe to assume like I was looking at 2009, who doesn't end the bank lost about 220 basis points.
In terms of charge offs.
Today, you don't expect this to be as bad probably half of as bad as a way to nine was it's kind of the working assumptions I know at the bank.
Yeah for for a couple of reasons.
So.
First of all.
The portfolio, our portfolios have changed pretty dramatically from a low eight or nine to 2019 2020.
So you know that.
We've taken really move the commercial portfolio more towards a secured nature and then on the consumer front really push the portfolios away from.
What we're never subprime, but closer to sub prime types of products than previously so for instance.
We used to have a pretty substantial shared national credit portfolio.
Frankly, which which contain the bulk of our commercial charge offs, which werent actual charge offs for were basically losses incurred through the sale of those of those pieces of paper.
So that that as a difference that was there in 2008 2009, that's just not exist as our portfolio today.
We used to have.
So much larger book of.
Leverage leases.
Aircraft leases that are as you can tell from the lease line are pretty much nonexistent side, I think our leverage portfolio down to investment grade railcars.
Then on the consumer side.
We had.
200, I want to say 200 plus million dollar.
Small business score product.
That perform pretty poorly through the financial crisis that number is that basically became a legacy product and I think we only have a $20 million something left to that portfolio.
So that was another big percentage or big charge off.
Line item for us land loans.
Was it was another area, where I think we had upwards of $50 million to mostly on the on the neighbor Islands took a fair amount of.
The hair cut there.
And finally on the indirect space we.
Used to lend a lot deeper into the indirect space than we do today.
There were losses there so when we segment re segment the portfolios for what they are today vis-a-vis, what they were and reapply loss rates.
Ebrahim.
It's kind of we get when we get.
Another another note is that.
Yeah, we were very aggressive.
Nine in taking things to charge off.
And in fact, we actually as you probably saw the numbers subsequent to the recession saw good amount of.
Cooler secured types of assets generate pretty sizable recoveries right. So yes, you're right. There's a differential but I think there's pretty good documentation behind what why that differential exists today versus the financial crisis.
That's helpful and I guess, just one bigger picture question, Peter you isolated portfolios around Asia industry, and such but it gives the perception and our understanding is the Hawaiian economy and a lot of benefit industries, we professional services et cetera leave all of tourism and visitor spending.
Dr was just in terms of from business standpoint, and I'm sure you stick in many.
Part of Chamber of Commerce type committees locally what's the view in terms of the island recovering from the tourism perspective, or the next six to 12 months.
Well I think of the most pressing issue is to continue on with the.
Health trend that we're experiencing.
Because nothing could be worse than Hawaii as a marketplace being.
I don't want to name names are being like some other visitor areas that are not having the same quality of outcomes that we're having.
Those those situations can create not just short term recovery issues, but long term branding issues.
So I think it's really important and the the consensus that I'm getting from this business Smitti is making sure that we have a positive health outcome is critical making sure that we have the resident.
Testing and contact Fracing capabilities.
In our marketplace. So that we can emerge so where that's going to make our visitors as well as residents horse feel safe and confident.
Business resumes is another important element and that is something that to some extent, we can control here in our islands, but a lot of that as science and federal as well and resource capability as well.
So I think that there is a desire to be up and running by the end of the year.
My guess is that's going to be.
Pretty slow transition.
Likely.
Intended to be.
So I think what'll happen is we're going to begin to pick up the local economy.
As our sold for a place to work from home policies adjust and I think they're likely to adjust based on the numbers. We have that should create some economic lift for us, but you're right. The visitor industry is 10% of GDP and indirectly a larger percentage as you pointed out and that will get back to normal.
I think the caution there is it should only go back to normal one when it's appropriate to do so.
Understood. Thanks for taking my questions if yes.
Thank you. Our next question comes from the line.
Casey Haire with Jefferies. Your line is now open.
Hey, good morning, guys, where.
Quick question on.
The guidance for Twoq, you, specifically can you speak to.
What's getting NIM down only one or two basis points is it.
Can you give more room on deposit costs are securities yields holding up just some color there.
Yes, just for now.
Yes, you've kind of nailed two of the factors. One is that the are you would avoid our deposit costs.
The other is.
The portfolio yield is hanging in there despite the lower rates.
And the other thing is is the a little bit of a mix shift more loans versus relative to investments what kind of those three things are kind of helping us support the NIM at this point.
Okay, and so our yet so how can security yields be holding up just given the shape of the curve I mean, and then also I'm, assuming if PPP continues to be a loan growth driver that would be.
I would be NIM dilutive now.
Yes, and I should clarify none of these the NIM guidance does not include.
The PPP loans that were going to be.
Booking in the second quarter.
In terms of the investment portfolio. What has happened is the mortgage spreads have widened out quite a bit so it's kind of held up the.
Yield on the portfolio as well as a prepayments haven't been as.
Hi, as we had expected so those two things are kind of holding up the yield on the investment portfolio.
Okay understood and then.
On the expense side expenses down 10%, what's a what is the what is the key contributor there.
A lot of it is has to do is discretionary expenses.
One obvious one would be like travel can travel so thats going to go away.
But there's other other issue other categories that are coming down.
Include variable comp variable comp is a big one that we already took down into first quarter.
And then some of the seasonal expenses that we had into first quarter, we'll of course, not repeat itself and then as well as the.
Separation, but it's going to be lot of the discretionary expenses coming down.
Okay very good.
And then just switching back to the to the credit discussion so the loan modifications.
But you guys outlined on slide nine there how much of that you just give some color as to what exactly you are doing and then how much of that.
It is as I'm, assuming that is largely concentrated in your.
You're.
Sort of your worry spots the lodging retail restaurant entertainment sector the portfolio.
Uh huh.
So.
On the commercial portfolio.
Dominantly within our commercial mortgage business.
A lot of that is really we're just seeing a number of our clients looking for principal relief and that really allows them some flexibility for the uncertainty and also to accommodate some of their customers that and tenants that meaning greatly.
In the consumer side residential mortgage and home equity are about 10% of the total.
And endure direct and the other director about.
11%.
Okay.
Just last one just on the on the Cecil.
Reserve build scenario did.
Mike I think someone mentioned that that unemployment is predicated on it on unemployment spiking up 24% or peaking at 24, 25% I mean, it sounds like were there right now. So I'm. Just curious is there did any of the reserve build outlook.
Was it based on on a sort of a down case scenario given that it feels like we're or are you. The base cases, where we are right now.
It does my point is it doesn't doesn't feel like it allows for much incremental downside from here.
No, we really leveraged off where we were at that point in time and clearly we'll look forward as we do next quarter, just see where we are and the impact of magnitude of what's happening.
Okay. Thank you.
Yes.
Thank you. Our next question comes from the line of Jeff will lift will D.A. Davidson. Your line is now open.
Thanks, Good morning.
Jeff just to re refrain maybe that that last question, so kind of getting into the day to adjustment I guess is yes.
Is that a march 31st provision versus April Twentyth, and just try to.
You frame up if you had expectations for a worsening environment. It plays out and we may be back off from the worst fears I guess to Q.
Provisioning.
If you could kind of frame up.
What that looks like in the advantage of how thats lowered or maintained.
In some fashion.
I think thats pretty difficult really will need to really move into twoq, you and see whats the magnitude and duration aspect looks at that point.
Yeah, I think that one of the challenge is Jeff is that.
Classically, we're we're modeling against trends right.
And right now we're modeling against trends as well as.
Ill call right so by outcome I mean so.
No.
It's hard for us the model with exact certainty when the work from hall stay at home policy directive will be lifted and if its lifted sooner that has a positive impact on the locally collar. It was delayed or it has more of a negative impact.
It's hard to tell now when the court travel 14 will be lifted and this is lifted earlier that means that more visitors will go into the market a bit later fearful visitors and committed work. So so the approach that we've taken is.
Well the quarter to quarter by quarter basis, we're making our best case assessment based on the information that we have available to us at our best guess for near term outcomes as best as possible, but but it just it does create a little bit.
More choppiness I think in how we approach.
Visiting them, perhaps than concludes passable not because that's our intent, but thats I think because the environment will find ourselves.
Right, yes lots of variables.
Maybe just two quick ones for.
Deane so the premium amortization, you mentioned about its sixmillion little over 6 million in the first quarter again Bacon that.
Margin guide is.
His expectations for that to to sustain at that level or or increase decrease given the margin guide.
The expectation is it will increase.
Okay.
And then the follow on just on the fee income side that other.
10 million for.
It was pretty high and I think you may be alluded to customer derivative activity is that is that what was in there and subsequent I guess you talked about maybe that tails off in the second quarter.
Yes, yes, it is in that line item.
Okay.
That's it for me thanks.
Thanks.
Thank you. Our next question comes on the line of Jackie Bohlen with KBW. Your line is now open.
Hi, good morning, everyone.
Jackie.
Looking to the drop that you had an F. T looking point to point from 12, 31 to 330 that roughly call. It 30 people or so.
Is that the extent of what we discussed on last quarter's call or is there more to come from that.
A best friend or some of the question, what where do you. What are you asking well you that you had to severance charges in the quarter and then you had a decrease in F. T E before any of the pandemic happened there was a discussion of some.
What you were doing it you work your expenses for the year and so I'm wondering if all of that has been dine and that's reflected in the March 30 at March 31st Ft. He or if there's more to come from that and you know if theres been any change to how you're thinking about that in light of the pandemic that's going on.
Yeah, well so there so there's a lot to impact there what you're asking.
So first of all we have not a cut back any staff.
As a result of the pandemic, which is to me it so thats an important piece of knowledge to understand.
Secondly, the 30 FTD reduction is is largely incidental to the.
The severance charge that we took.
In Q2.
The severance charges that we took in Q2 was largely a result of.
Several.
Executive level or senior level positions that we are repositioning.
That will result in pretty meaningful.
Salary savings for us, but do not really represent.
A meaningful change that.
Yes.
It's kind of the wrong to wrong personal category to compare against.
Hi.
So those salary savings are they reflected in that 10%.
I'd reduction that you're anticipating into Q or will some of that flow in later in the year Q.
It there's some in Q2 and and so.
Some in Q3 and four.
Okay.
Would you say the bulk is in Q2 or would you expect the bulk of the in Q3 Q4.
Oh, I would say, it's evenly spread out.
Okay.
Okay. Thank you.
And that just for clarification purposes, Peter you mentioned that 15% of your staff is awaiting activation.
That means.
That means that they are porting Port example, we have a certain branch activities.
That we basically need to have backups in case, we have people, calling in sick or people that aren't able to work because none of the schools or are in session.
That means that we have operational staff and critical areas like vaults or items processing, where we have the same need for redundancy.
So because of lots of times, a day to day things being so different like.
People.
Frankly, lower income people, having to figure out what to do with their kids, who are supposed to be in school and because of you know the fact that people are our are getting sick out. There. Unfortunately was this with this virus, we felt a very strong need to have a good amount of redundancy. So that we can.
Maintain or operation straight through the situation.
Okay. Thank you that's helpful.
And then just one last one from me and then I'll step back I'm in terms of that the PPP loans that you have the 2100 that you discussed that had been process.
What amount had you can is approved where are those all the true.
There are all approve they'll all of those loans have guarantee numbers from the us BA.
Okay, and what general loan size should we think about realizing that that's a range of loan sizes when trying to calculate the fee that you would expects to receive an amortized over the life of alone.
Oh, I don't even though it.
Thanks for 2200 16.
Thanks, I think the sea rays, as 1% to 3% I think Mike I don't know this Jackie but I think if you looked at the moment probably is going to guess is any.
[laughter].
Okay.
Okay. Thank you.
Oh.
Thank you. Our next question comes from the line of Laurie Hunsicker with Compass point. Your line is now open.
Hi, Thanks, Good morning, and team at my first question for you just wondered how we should be thinking about the tax rate here.
The tax rate we are.
About 20% to 21% in Q2.
Okay, Great Alright, and then Mary I, just wonder at home just a couple of things at first I just want to make sure oil exposure is zero is that correct.
That's correct.
Okay, and then monetize family.
If you were at 2.0 go ahead Im sorry, yeah.
I'm, sorry, I just wanted to clarify so we have though.
Classic oil and gas exposure, we do have some retail like service station exposed yes.
And we do house, so net natural gas exposure.
Yeah.
Got it okay perfect.
Sure Chris about your 2.6 billion or so how much of that in multifamily.
It's about a 47%.
47% dismal definitely okay, great and then I'm just I guess last question.
Peter just going back to what Ebrahim was asking regarding the Hawaii economy, just wondered if you could talk a little bit just sort of the tangential effective cures in another words is we think and I love. This breakdown, it's super helpful and let me when I talk about GDP by industry or personal income by industry your comps by industry.
Just how we think more broadly about the tangential intact. That's tourists then that's right thinking sort of encompassing everybody from for example, the cleaners.
<unk> service the hotels, what what would that percentage look like if if we if we took sort of I brought her swipe.
I'm sure some thanks.
Yes, so I think that you know the.
The numbers somewhat speak for themselves, but the biggest impact of this unprecedented pull back and tourism.
Is the effect on jobs.
Because it's it's a.
It's a job heavy industry.
And.
You can't get away from the fact that a big big percentage of the states job.
Job ranks come out of this industry. So that has been an absolute.
Problem.
It is a crisis for us so we have to deal with.
We'll also is likely drew and I don't know this I don't know the specifics around this but many of these jobs tend to be lower wage jobs as well.
And so.
Theres a bit of a disproportionate.
Outcome when you get to how many jobs have been lost and what the reduction of personal income.
How that will play through to the economy is.
Somewhat tough to tell.
But the way we think about it is the shipped to our community capital C. is substantial and so we're very active around trying to.
Support for community.
From.
Contribution standpoint, it will support the committee from a product standpoint, and it's going to help those that that exact.
Ranking for a class classification of people.
The I think the other thing you're getting at is what's the indirect impact on the visitor industry, 20% of jobs, 10% of personal income 10% of GDP. Yeah. It's it's a big number I mean, there's no there's no getting around that and so yeah, certainly professional services is going to be.
Impacted.
You know real estate and trades is going to be impacted because these workers live in sleep someplace.
So I don't I don't mean to isolate GDP at a 10% and jobs that 19% and personal income an 11%.
Those are the direct numbers and.
There is absolutely an indirect correlation to visitor activity, that's going to have a meaningful negative impact on the state for sure.
Great. Thank you.
Thank you. This concludes today's question and answer session I would now like to turn the call back the Sandy work for closing remarks.
I'd like to thank all of you 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 for their class clarification on any of the topics discussed today, thanks, everyone stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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