Q2 2020 Bank of Hawaii Corp Earnings Call
2020, <unk> earnings conference call at this time open.
And then only mound after the speakers presentation, there will be a question and answer session to ask a question during the session when need to press star one on your telephone I remind our this conference is being recorded.
You require any sort of interesting. Please press star zero I would now like to hand, the conference over to Sandy Weirich director of Investor Relations. Please go ahead.
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, being should get Laura 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 why we believe our assumptions are reasonable there are a variety of reasons. The actual results may differ materially from those projected during the call would be referencing a slide presentation as well as the earnings release, a copy of the presentation or release are available on our website via wage dot com under Investor Relations and now I'd like to turn the call.
Her to Peter Ho.
Great. Thanks City good morning, everyone.
Before I start our or comments for me I've, just give you a little commentary.
On the Hurricane Douglas, which came through the island's this weekend.
Yesterday Douglas actually.
Missed a the big island without a without actually go into a hurricane Oh warning passed by both Wahoo Oh, we.
Where we were hit a hurricane watch, but really had somewhat nominal impact from from the storm and then thankfully cleared Courtney late last night or actually early this morning. So.
From that standpoint, we obviously feel blessed and fortunate to have.
Two of 'em made it through this this near mess and given the circumstances, we'll certainly take that.
Today works bank of wise six month anniversary.
And our dealing with the covered 19 pandemic.
As our first executive.
Oh has meeting was held on January 27th of this year.
I have a notation that might well look how old are the that describes that meeting is a meeting to discuss the virus in China.
Oh things have changed in six months.
As you know covered by a chain has had a dramatic effect on nearly all aspects and walks of life globally. A nationally boy 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.
[noise] this past Friday, our board met to hold a regularly scheduled board meeting.
That meeting I presented.
Six month review of our covert 19 response, but I thought before we get into the herd of our quarterly review.
I'd share with you.
So what I shared with them.
Segmented by review into our core stakeholders, sorry community or customers, our teammates and of course our shareholders.
From a community standpoint, we recognize it as a leading company in the island's for nearly a 123 years people expect us to take a leadership role indicative of ourselves freely and types of prices and made.
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 supporting and leading our community at this time.
Our foundation also made early other pandemic, a 3 billion dollar gift to the Hawaii Committee Foundation to provide covert 19 humanitarian health an economic support to the committee. 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.
[noise] I note that funding as I mentioned was provided directly from our foundation, whose capital base is separate and distinct from the bank.
[noise] finally from what you really standpoint, Beckford Foundation recently released a study called covert 19 at Hawaii facts and insights study was performed by anthology research a respected local market Research company was based on live and online survey data from over 1000 respondents making it the largest study of its.
Slide in Hawaii.
Today, We believe this study will help better and form the general community help local policymakers make informed decisions.
From a customer standpoint, we've been very active in providing real solutions of resources to many parts for a customer base.
In over 4500, PPP loans totaling over $560 million, which helped more than 17000 people realign their loan terms support.
The near term dislocations caused by the pandemic.
With numerous government stimulus than deferral programs a foot during the pandemic, we saw contact center volumes Spike 69% in the month of April require enormous commitment and support from our contact center stuff.
Also as customers of sheltered closer to home, we see an 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.
36% online deposit account openings growth of 300% online mortgage outgrowth of 142% and online humalog outgrowth of 79% year to date as compared to last year.
As for our teammates we've been able to hold ft level steady.
With our cafeteria operation suspended we've created a program called meals to go repairing a weekly to go meal available to all employees to date, we've distributed nearly 13000 meals serving over 50000 people, we encourage our employees to share their meals with family friends and neighbors.
Our employees health is are Paramount concern and we spent over $280000 on PPV and plan to spend ultimately approximately $2 million plexiglas barriers and thermal scanning equipment.
We've built a phone based daily health screening out for our employees that are in the process of upgrading our filtration 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 331 of this year.
Sure.
We continue to fortify our balance sheet from credit losses in a measured appropriate balanced way.
Before I turn the call over to marry who will brief you on credit quality and the Dean who will discuss our financials I wanted to finish off with a quick review of the local Hawaiian economy.
Scott I got that okay.
Unemployment at away moved from 2.4% in March 23.8% and 23.5% in April and May as a 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 you heroes, most recent forecasts, which is foundationally, what we incorporate into our own risk and financial modeling.
As you can see these numbers pickup 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 trends and infection rates here. The islands. So let's try policy decisions around the rate of reopening.
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 11% at 5%.
I think I'd apply the same contingencies on directionality of the accuracy of these forecasts of this time.
Fundamentally.
Roughly.
Remains well positioned.
Solid credit statistics, our base operation continues to grow in the challenged environment.
Our liquidity and capital levels are robust now let me turn the call over to marry sellers. Thank you Peter.
At the end of the quarter the loan portfolio net of PPP balances totaled 11.3 billion.
Reflective of our island economies remain 60% consumer and 40% commercial was 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 superior outcome and continue to allowed 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 5.1 billion or 18 basis points annualized on average loans up 1.4 million for the link period and up 2.8 million year over year.
Nonperforming assets totaled 22.7 million at period end up 2.1 million from the first quarter than up 900000 from the second quarter 2019.
Criticized loans outstanding increased 1.4 million to 201.6 million or 1.71% of total loans.
The credit provision was 40.4 million, which after net charge offs of 5.1 million resulted in a 35.2 million dollar 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 where market with the impact of covert thank team.
As Peter noted the estimate was anchored ARPU heroes, most recent baseline forecast, but also considered the uncertainty of this path to recovery.
At the end of the quarter the ratio the allowance for credit losses to total loans and leases was 1.47% were 1.53% net of PPP phones.
And the reserve for unfunded commitments was 2.5 million at the end of period down 800000 from the first quarter and down 4.3 million from December Thirtyth 2019.
Through the end of the second quarter, we provided payment relief to over 17000 customer count on loan balances totaling 1.9 billion or 16% of total loans and leases outstanding.
After peaking in April we saw a significant decline in new request for assistance from our customers both consumer and commercial.
73% of the consumer loans with payments froze, our secured with residential real estate with a weighted average loan to value 61%.
49% of these customers made at least one payment in the second quarter.
89% of the commercial loan 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 co bid a number of industries, particularly retail lodging and restaurant and entertainment are facing significant challenges.
In total our commercial loan exposure to these industries remain flat for the link period at 11% of total loans exclusive of PPP.
Our retail segment totaled 600 million or by percentage of total loans with 91% secured by real estate with a 54% weighted average loan to value.
1.7% is unsecured and deferred.
99.9% of the unsecured exposure continues to pay interest.
The lodging segment is 500 million or 4% of total loans, 77%, it's 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 million or 1% of total loans, 39% is realistic secured with a weighted average loan to value of 63%.
23.5 million is unsecured a deferred with an average exposure or 400000.
96.9% of the unsecured exposure continues to pay interest I'll now turn the call back to Dean.
Right.
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 million linked quarter and by over $1 billion year on year.
The second quarter loan growth of 4% was driven by $543 million on PPP loans.
Analyzing all the PPP loans and repayments on line draws resulting from the pound coal that pandemic loans grew modestly by $16 million in the quarter and we expect moderate loan growth for the rest of the year.
In the second quarter, we experienced a record increase and deposits of nearly $1.4 billion or 8.5% linked quarter and $2 billion were 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 our balances by nearly $1.2 billion or 7.4%.
In addition, we reduced our public time deposits by $53 million in the quarter to 610 million.
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 as 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 60% are solid and growing deposit base provides additional asset funding opportunities and pricing flexibility, while reducing our funding risk profile against risk assets.
The portion of the excess liquidity was deployed into our investment portfolio and increased balances by $300 million to 6 billion.
We maintained the high credit quality and liquidity by adding AAA rated securities with reliable monthly cash flows.
AAA rated securities.
Present, 95% of the portfolio balances and 100% our E rated or better.
The duration of the portfolio was 3.11 years at the end of the quarter and well within our risk tolerances.
The investment portfolio remains a stable and secure a source of liquidity or funding our balance sheet.
Our strong risk based capital levels improved in the second quarter and remains substantially above the well capitalized minimums.
We added to our excess capital levels, improving RCT, one tier one capital ratios by 23 basis points to 12.04%.
Our capital position was further enhanced by a reduction in risk assets.
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 million more a pre tax dollars then is required to remain well capitalized.
And 826 million 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 second quarter of 2020 was $38.9 million were 98 cents per share.
Net interest income on a reported basis in the quarter was $126.7 million up 700000 from the previous quarter and up 2.6 million from the second quarter last year.
Included in the second quarter net interest income was an interest recovery of $2.9 million.
As Mary discussed we recorded a current credit provision of 40.4 million this quarter.
Noninterest income totaled $51.3 million into second quarter of 2020.
5.2 million from the previous quarter and up 5.9 million from the second quarter last year.
Noninterest income in the second quarter included a gain of $14.2 million from the sale of our remaining visa shares.
Adjusted for the VSOE sale lore, noninterest income was due to lower deposit fees other service charges and customer derivative revenue.
For the third quarter of 2020, we expect noninterest revenue to be approximately $37 million to $38 million.
Challenges continue due to lower levels of customer activity during the ongoing disruptions from the colgan pandemic.
Noninterest expenses in the second quarter totaled $88.9 million, a decrease of 7.4 million from the previous quarter in a decrease of 3.8 million from the same quarter last year.
The second quarter in the second quarter, we accrued $1.1 million and special bonuses, which were which ended in June for employees working on site.
In addition, we accrue $2 million and corporate incentives, which is down from 5.5 million accrued and the second quarter of 2019.
Non interest expense in the first quarter of 2020 included seasonal payroll expenses of 3.1 million.
Severance expenses of 4.7 million 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 million.
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 0.82% the return on equity was 11.58% in 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 for the second quarter of 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 24 months.
Shareholders' equity was 1.35 billion at the end of the second quarter.
During the second quarter, we paid out $26.8 million or 60% of net income and dividends and our share repurchase program remain suspended.
And finally, a board declared a dividend of 67 cents per share for the third quarter of 2020.
Now I'll turn it back over to Peter.
Great. Thanks, Dave.
Thank you for your interest in banks quite today, and now we'd be happy to entertain whatever questions you might have.
Thank you very minor to ask questions you will need to Craig Dahl wondering your telephone to withdraw your question press kept Pandora hash key please standby will be compiled that you're in a roster.
Our first question, Tom Casey Haire with Jefferies. Please go ahead.
Yeah. Thanks, good morning, everyone.
Good to hear how chain Douglas did not.
Not do any damage good to hear so.
One Casey.
Yes, you are they getting surfing and Peter.
Okay.
I I hope that thing up a longtime oil.
Understood just to see them.
Okay. So.
Maybe start on our credit quality Mary.
Some of the slides very helpful in terms of the forecast obviously.
Take a couple of 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 you know what does that.
Looking at you know when the winter tourism is open up to the island in the Governor just pushed back a month can you just frame it around that in terms of what's your forecast.
Assumed for when when the islands are open again to tourism and just some sensitivities around there as we as we try to take about reserve build going forward.
Sure well, we actually got few hero, 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.
Okay, and so I.
I mean.
In terms of the the visitors.
2021 is.
Oh.
Does it assume 50%.
Returned to pre pandemic levels or just trying to size what.
What.
What you guys are baking and are you here I was speaking out.
So pre pandemic was about 80% occupancy so add 40 to 50 you'd be at about half.
Sorry, I missed that alright, and then.
On the that the the.
The PPP loans for two years.
You guys.
Do you guys should.
Should we assume that that.
That means that.
The.
The cash balances are going to you guys are going to run without liquidity for that for that same amount of timing.
And then just following up on the NIM.
The investment securities yields what.
What are the reinvestment rates currently and how long if you don't get any relief from.
Yields how long will it take for for the other securities booked up to bottom.
Okay. So I think there are like.
Your questions in there so.
Thank you.
Seemed to be sorry [laughter].
BP loans cash deposits those have already started running off I mean, if you compare the.
The amount of loans versus what we what we identified as the deposits which were about 200 million.
We expect that to continue to run off in probably into the third maybe 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.
Kind of securities that were buying.
So roughly 1%.
And then the kind of where would bottom out it would take a while fourth to bottom out.
But I would tell you say.
Maybe a year or two year or two Bob it kind of lower level.
Okay very good thanks. Thanks.
Sorry go ahead.
Now I'll just ask if there were other questions that you had the no doubt there was a bunch in there all right I'll step back thanks, guys.
Hi, Susan.
Thank you. Our next question comes from Ebrahim Poonawala with Bank of America Securities. Please go ahead.
I just wanted to follow up on the margin. Indeed, I guess, if you go back last quarter I think at the time again, thank Greg noted volatility but.
I think your guidance I wanted to be sequential margin compression looking out.
If you look at what happened at the margin in second quarter.
Closer to sit mid Seventys exchanges.
But it probably isn't indicative guidance for the third quarter, just talked wasn't domes off has anything changed in terms of what you were thinking about asset yields.
Back in if you listened today, what it is all of this attributable just to date excess liquidity that you will see it because of deposit growth and PPP.
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 fraud throughout the rest of the year so that came down.
70, 80 basis points in the quarter.
So that changed the.
Resolves quite a bit.
In terms of liquidity that did impact us.
About half of the drop was was due to liquidity in.
Additional deposits.
So 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.
Don't build some buildup of liquidity yeah.
Got it so and I guess.
That does include PDP without any could you remind us what that BP fees all outstanding if you assume all this comes back how much is PPPC remaining at the end of the second quarter.
Well so my my forecast assumes that we don't see any.
Prepaid prepayments and therefore, we do not.
Accelerate the recognition of the fees.
So so that's all built into that forecasts.
Understood and disaster.
Where do you need.
Sure longstanding, but I can called off.
Later, just as a separate question Peter if you can all we can just to talk about the default trends comparing 1.9 billion at the end of August end of second quarter was 1.1 billion over two to 401 two designs.
To us like you provided some good color that also dedicated a six of these borrowers, but let me think about the customer the photo 10. So.
If you provided some.
It's just that said on how many of them but.
To paying status over the last few months just give it does give us a sense of what you think will happen you don't look to the commercial borrowers going back he and do we need to full fledged deal can you walk tourism and they call them in order to get debt.
Let me ask married to start of that can I can chime in here.
Sure.
In our approach to providing relief to the customers. We really took advantage of the carriers Act, which allowed us to be very flexible what we're doing and so are we provided on suffer leave that aligned with what the GE Aziz we're doing.
As Weve noted, 92% of our commercial to pro customers, they're making their payments and 49% on consumer and in our discussions with them. It appears that many did take its strictly us 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 would be very manageable.
Ebrahim I guess, the only thing I would add there is.
I think that's a deferral activity is maybe not a great indicator.
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 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 at least from our standpoint.
We're driving that more from the standpoint of understanding what the base liquidity level is of our borrowers forward and with a view that you. 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 liquidity to support that obviously, one for both rating and if not another form of rating.
Got it and that makes sense, Peter so and just to guide if you're going to ask one last question.
Just when you think about the resiliency of the Hawaiian economy.
Dualism fields to open over the next few months in any meaningful me just talk to us in terms of one the ability of the economy. The local government to would stand up again and it did oblique point, but you would think when a lot of these borrowers who have the liquidity maybe you can manage to another three months.
In the Lockdown mode, then things start sort of like falling off a cliff make something that you would what do you have all in terms of division.
You asked a lot of items there.
Well I think that the but the easiest.
Data point to point to is the.
Kind of the Delta in unemployment from early pandemic to kind of mid pandemic dropped pretty substantially and that was the result of the personal reopening so moving from a shelter in place to a partial reopening without any visitors into the islands.
Number one and number two.
The effects of PPP, and stimulus checks and new why plus ups and the like so.
I think our ability to withstand the crisis net of bringing visitors.
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 timeframe.
But but your but you're right I think for the economy to get back on a full footing.
We will require a resumption of visitor.
Inflow.
And I would I I hesitate a little bit to think too much of that as a state of Hawaii issue because.
Irrespective of whether the state decides to amend its quarantine rule or not I think the real issue is what's happening now.
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.
This uptick mode nationally.
You know the outlook for the visitor industry is not not terribly buoyant and to the extent that weekend as a nation get that back under control I think things kind of take take over from there as it relates to your question on the the.
The resiliency of the state of with state actually has a relatively high credit rating relative to the other 49 states.
And we'll just have to see like like every other municipality.
But as of right now that are there.
There.
As a sense that things will be shutting down imminently.
Well I know that there's a lot TENX to appreciate the color. Thank you.
Thank you next question comes from early with da Davidson. Please go ahead.
Thanks, Good morning.
Just couple of questions on the.
Maybe in the non interest income Dean appreciate.
The guidance there, but wanted to dig a little deeper in the visa position is that has that gone at this point.
Yep Yep, Okay, and and then the I guess.
I assume that I think that had associated kind of carry cost to it is that barring other investment securities gains losses that that's more of a neutral event going forward.
No the.
Shares that we sold were ones that.
We just held on our balance sheet. So what's represented now and the income statement is a previous sale. So we do still have that swap in place.
Okay.
We're still class B class B, yes.
So when when the when the shares convert that will go away.
I see okay. Thank you and then on the.
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 it slowly begin to pick up and 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 that.
The consumer but wanted to see if there's anything on your end that.
The piece of that build Oh, yeah. Thanks, Yeah. It's a good question Jeff.
So Q1 to Q2.
We saw about a six and a half million dollar reduction in those sorts of fees okay.
And so that would be OTI that would be.
Facts that would be.
You know merger merchant merchant services.
Had a 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 that and those numbers kind of yeah generally reflect a pretty draconian stay at home.
Posture.
From an economic activity standpoint, so you're right as the quarter progressed it as the economy opened up a bit we did see some limitation in those levels that was driven by.
By volume levels increasing.
And.
We actually has a 630 of reinstituted or ATM fees, which is which is actually the only fee that we waived during that period. So.
Some fees will float up some not so much like foreign exchange, probably won't move up until we start getting for visitors back into the marketplace, but I think it's reasonable to think that you know that six and a half million dollars downward delta could could replenished just in the current state maybe.
By a third I'd call it something like that.
Great that's helpful.
Yes that is perfect in mid just last one.
Mary.
The NPV additions in the quarter any comment on.
Those pre co good stressed or just the makeup of of what came in.
It was a one residential loan that actually was having challenges pre committed we have entered into a repayment plan and it should go back on accrual in the first quarter of 2021.
Great. Thank you.
Yep.
Thank you on our next question comes from Andrew Musically Viper Sandler. Please go ahead.
Hi, good morning, everyone.
Andrew.
Hi.
Good question is providing revolving around the provisioning going forward and just how much of the provision is driven by that you harrell unemployment rate forecast and we saw a nice drop here in June if that continues and its at levels out your order trends lower below what they are for kettler way to forecast is how should we look at the provisioning going forward.
Implement it does appear to be below what their forecast.
Well, we did base it on your heroes. So it is driven off that we.
We did have a bias to 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.
Yes, so so Andrew just to just emphasize the.
Reduction in to 13.9%.
I guess played somewhat into our provisioning, but because you hero actually didn't revise their Q3 in Q4.
Unemployment estimate which were kinda back into 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 in 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, nine and fill that 24 ish number and the earlier months. So.
I don't think that the end of provisioning is in store for us. So anytime soon although I guess I would say that.
Q2, with probably a pretty.
Pretty meaningful number for us.
Okay. Thank you that Thats really helpful.
And then just on operating expenses.
To make some of those were lower just with.
Fewer transactions lets customer activity.
Yes, so how much too.
I guess customer activity would that need to increase for expenses to get back to me. The run rate that you were at like a year or so ago.
Heard your comments about.
Response to Jeff about maybe some those transactions going back by about a third but do we need to have tourism come back fully for a higher run rate or expenses.
Expenses or can they stay below 90 million for the foreseeable future.
Yes, it did the level of transactions in a impact the expenses.
It's I wouldn't say, it's going to be a very material increase.
As as the transactions do come back but.
It'll probably drift closer to 90 million, if we get something above 50%.
Kind of return kind of economic activity on the fee side.
So some increased one on much.
Okay.
Thanks.
Yes, Andrew I think the expense side is going to be.
Code that that upward or downward the upward adult I'll call. It is gonna be driven more by our provisioning activity versus economic activity.
Economic active as you point out has some impact, but it's pretty small flick a million bucks or so yeah.
It's really okay, let's really directly it's really not improve providing getting come up.
Okay, very good the provision and Mike and just the accruals that way maybe through salaries and benefits that have the bigger effect on on expenses.
Yeah, it's really variable comp, but yes, that's right. Okay. All right. Thank you.
Yep.
Thank you next question is from Jackie Bohlen with KBW. Please go ahead.
Hi, good morning.
Hi, Jackie.
I will highlight premium amortization behaves between this quarter and last quarter.
So it did go up by believe 1.3 million.
Two above seven and a half million.
So it did increase quite a bit.
Signage and Thats reflective of the just the market.
With a mortgage rates being where they are because a lot of refi activity.
Okay, and what what are you assuming next quarter in that margin guidance you provided.
In terms of premium am I don't have.
Yes.
I don't have exactly what we factored in but it is assuming a higher premium.
For the quarter.
Definitely needed just ballpark and kind of what you're thinking in that okay. Thank you.
And then this is Peter it's probably for you.
Wondering if you could provide an update on kind of where you're standing in terms of longer term reinvestment you know that you've been doing on if any of that has been pie. If any of it is going ahead and also how customer behavior and great statistics on digital adoption, how that might be impacting any future.
Your efficiency projects you have in the works.
Yeah, So I guess I would say Jackie that.
The the.
Situation with Covidien.
Has.
In some ways accelerated.
A lot of the direction that we were heading in any way. So as you know we've made a lot of investment today in our digital platforms.
And continue to do so and I think we'll continue to do so simply because they they generate returns for us.
So the other generating more revenue or they help us bring down makes sense for efficient.
So I want to at this point Fortunately, we got most of the fat end of the the investment curve in already for the investment standpoint, we do have some 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 but ultimately the idea is that we're generating more revenue there. So that's a positive that probably doesn't get on the way of our investment making decision even in this environment.
As it relates to.
Footprint, which I think is what's you're probably driving towards.
Pre pandemic, we were at 68 branches, we skinny that down to 31.
Into the teeth of the pandemic and now we've widened out back to about 40, and and we're going to you know we're going to we're going to see what happens moving forward from a customer transaction standpoint in the branches because we've seen that activity fall pretty precipitously argue.
Yes is that once things go back to quote normal.
That will result in some upward shift in visitor traffic back to the branches, but I think the theres, 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 belts back to pre pandemic levels and that obviously creates.
Efficiency opportunities for us down the path.
Okay, So I would guess that.
The evaluation a bad seemingly have regulation on the virus could be tied in with some of the larger decisions you were talking about in about a year or so.
Yeah, I mean, I think there those are always ongoing conversations but.
I think I think we won't really know what the true transaction volumes will look like given our branches until we get to some more normal state of activity.
Okay makes sense great. Thank you for all the detail I appreciate it.
Thank you so much firing line that ladies and gentleman, who ask a question just press Star then one.
Our next question some Laurie Hunsicker with Compass point. Please go ahead.
Hi, good morning.
Sorry.
He and I wondered if if we could just go back to the margin guidance that you were giving.
On six to seven day point.
Next quarter, where you'd hearing that off the headline them at sweetie, three or where you backing out.
The interest recovery back how you now coming off of that she is 77 acute 70 margin.
Yes, I I it was off of the adjusted so it would.
If you kind of did the calculation puts us at about 2.7% margin.
Okay perfect. Okay, and then the other question that I had was and I appreciate that you're not including any of that PPPC forgivenesses.
And your margin, but 562 million what are the total theme you expect over the life that's fine.
In total it's a it's about 18 million.
18 million okay.
That's great and then married just a question for you.
Office exposure, where where do you guys scans and do you have an LTV on that.
I do it's 12% of our total commercial mortgage book and the weighted average LTV is 59%.
Okay, Great and then some question on leverage loans do you have a dollar amount and then also maybe help us think about how much of that is Gulf Con government contracts.
We have 54 million in leverage exposure.
3% of our total Cnine 26 percentage is essential to I mean, sorry, 74% is kind of essential businesses I don't think any is really related to government contracts.
Okay. That's helpful.
And then I guess I'm, just kind of going back.
And we'll be more question well.
Help us think about whats your target as for your reserve to loan.
Well, we don't we don't actually target, we though so.
That would be.
Kind of different from how we set the reserves so the reserve actually.
It's really a function of what the reserve requirement that creates your Alex your your provision.
And that's really not targeted as much as it is a calculation for 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 looks like what are the reasonable unsupportable prospects.
Moving forward with a one year timeframe against what's the intrinsic quality of our loan portfolio and so.
Actually we're we're fortunate in that we have a lower.
Risk asset profile as a percentage of people, earning asset that most banks, which gives us a little bit of its going to advantage in terms of being able to.
Afford the provision and other things that earnings support if you will.
Okay. I mean again, just looking at that they're looking at your reserves at the TPP, you're at one, particularly once people or something like that mean, you had a huge gain.
The gains this quarter, if we looked at your loan loss provision at 40.4 million. If you hadn't had that that these again.
Do you have thought about that number differently I mean I realize there's.
There there is done.
Mr. In terms of Theres massive unknown right and so I'm just trying to understand Directionally as you said like maybe a comes down obviously appreciate there's a lot of Americas and just trying to think about how much maybe the game play Dan or how to Steven even directionally, how you're thinking about.
Where you're comfortable with that number.
Yeah, maybe so asking this question twice that yeah. Thanks.
Yes, no. So the the kind of the the first they after the first question is no our provisioning at our reserving.
Really they have anything to do with our decision to either take or not take the visa gain.
That was a that's a investment that we've had for many many years and actually a bit of the process of selling portions of that investment for years now.
The provision on the from up provisioning standpoint, I guess, what I would say is that.
These are uncertain times and.
And so there's a certain level of of in the accuracy of that she has built into everyone's provisioning that for those companies that have the ability of the earning capacity to provision.
In the healthy way I think thats, 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 kind of a separate analysis.
Okay, great. Thanks, I'll leave it there.
Well.
Thank you and I'm not showing any further questions invacare I would like to turn the call back to see the wireless for any final remarks.
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 I need further clarifications on any of the topics discussed today. Thanks, everyone.
Thank you ladies and gentlemen, this concludes todays conference call. Thank you for participating with me now disconnect.
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