Bank of Hawaii Corporation (NYSE:BOH) Q3 2020 Earnings Conference Call October 26,

2020 2:00 PM ET

Company Participants

Cindy Wyrick - Director, IR

Peter Ho - Chairman, President and CEO

Mary Sellers - Vice Chairman and Chief Risk Officer

Dean Shigemura - Vice Chairman and CFO

Janelle Higa - Vice president and Segment Finance Officer

Conference Call Participants

Ebrahim Poonawala - Bank of America Merrill Lynch

Jeff Rulis - D. A. Davidson.

Jackie Bohlen - KBW

Andrew Liesch - Piper Sandler

Laurie Hunsicker - Compass Point

Elan Zanger - Jefferies

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Bank of Hawaii
Corporation Third Quarter 2020 Earnings Call. At this time, all participants are in
a listen-only mode. After the speakers' presentation, there will be a question-and-
answer session. [Operator Instructions]

I would now like to hand the conference over to your host, Director of Investor
Relations, Cindy Wyrick madam, please go ahead.

Cindy Wyrick

Thank you, Achieve. Good morning, good afternoon, everyone. Thank you for joining
us today as we discuss our financial results for the third quarter of 2020. On the
call with me today is our Chairman, President and CEO, Peter Ho; our Chief
Financial Officer, Dean Shigemura; our Chief Risk Officer, Mary Sellers and also
joining us today is a newest member of our IR team, welcome Janelle Higa.

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 will be referencing a slide presentation as well as the earning
release. A copy of the presentation and release are available on our website,
boh.com under Investor Relations.

And now, I'd like to turn the call over to Peter Ho.

Peter Ho
Great. Thank you, Cindy. Good morning, everyone. Aloha. I thought what we would do
today is follow along with the path we�ve taken over the past couple of earnings
calls and give you a little bit more of an expanded commentary before we get into
our Q&A. I will kick-off with a descriptor on the economy and our local experience
with the Corona 19 virus. I�ll then turn it to Mary who will share with you some
credit highlights and then to Dean for financials and then, as he finishes up,
we�ll be happy to answer whatever questions you might have.

So, let me begin with a description on the economy. I�d say, relatively stable
outcome of most recent through the past quarter but obviously at a lower level as
we are able to like or appreciate. We did see a clip up in unemployment for the
September month. So September clipped up to 15.1% versus that 13% range that you
see for the June through August period.

A lot of that�s driven by, there were a number of WARN Act actions taken within the
community and I guess, one thing to note there, but even with the increase in
unemployment, for September, if you take those three months, for the quarter they
effectively came in online with the UHERO forecast.

You see in the light blue bar that UHERO, which is the analysis that we base much
of our credit decisioning off of is calling for a 13.4% fourth quarter unemployment
level and in conversations with some of the senior staff over there, they feel
cautiously optimistic at this point that that credit is achievable assuming that we
get a continued slow, but I think positive reopening of our TRANSPAC activity.

Okay. So now, let�s go to the next slide. Here you see on the next slide, just an
annualized representation of unemployment. The 9.25 UHERO forecast you see a little
bit more constructive � a little bit higher for 2021 and then dipping down for 2022
and 2023. This is a line with a lot of discussions that we�ve been having with our
larger commercial customers and certainly our hospitality customers who really
point to 2021 as a restarting year for us and hopefully getting to a meaningful
level of activity kind of into the 2022 year.

Go to the next slide. It just cuts a little bit on GDP and personal income. You see
the differential in forecast between the gold and grey bars versus the blue bars.
Unemployment � I am sorry, real GDP forecasted to rebound a slightly more muted
fashion with most recent forecast. But I think maybe one of the more important
slides or important takeaways on this slide is to recognize that well, GDP
obviously has taken a substantial hit here to the island economy for obvious
reasons.

Personal income is holding at reasonably well. And so the most recent reforecast as
of September actually has personal income falling pretty much early in less than
what we originally forecast.

On the next slide, to give you a sense for how the local housing market is held up.
The answer is surprisingly well. So not unlike a number of other mainland
marketplaces, housing, for lots of different reasons is a bright spot in the
economy. You see, on a year-to-date basis, single-family homes have had a nice
steady increase in median sale prices of 3.3%.

Inventory levels very constrained. As we look at point to point September this year
versus last year, a bit more price action, prices up 13.3% and sales beginning to
accelerate. And again, very tight inventory conditions. Similar story on the
condominium side. I think condominiums perhaps are being impacted by less new
product coming onto the marketplace.
But again, you see a pretty steady, year-to-date median sales price increase and
inventory conditions that are just awfully constrained as of right now.

Onto arrivals, so, I think most of you are aware that beginning on the 15th of this
month, so we are ten days into our pre-travel program, Hawaii began welcoming
visitors, as well as returning our intended residents and alike back to our islands
through pre-test program. So basically, to the extent that you receive a recognized
PCR test from a number of approved providers � preferred providers we call them, we
are allowing people with a negative result to come into the islands without having
to go through the 14 day quarantine.

And what you see here obviously is that�s had a very positive impact on TRANSPAC
activity. So, you see on this chart that the day before the program went into
place, we had upwards of 2,000 visitors on 10, 15 days the program launched up to
8.2 at some point on 8.3. You see that pent-up demand a bit of a dip, but I can
tell you that through the weekend, we�ve begun to bow back to those prior levels.

So, 10/22 you see 6,200 visitors or returning TRANSPAC of 23 is 5.8 in the 24 plus
6.3. So, a nice steady increase. Asking around town on what people�s early
sentiment is on the results for, albeit it the last week and a half, most people
feel pretty cautiously optimistic. Frankly, these numbers are a little bit higher
than what they would have anticipated. And so, I think this bodes well and
certainly it gives us a pathway to get the U.S. domestic market reopened which is
two-thirds of our arrivals still need to work on international even Japan, although
there is a lot of activity happening at the illustration level to help them make
that a reality.

On to the next page, the infection rate here in the islands has generally been a
good story. You see with the chart on the left shows you the activity really
experience what I�d like to call a post July 4th ramp up where we saw real
exponential surge credit to the Mayor of Honolulu, because he is mostly
concentrated on O?ahu 8/27 stay at home order.

So, a bit more relaxed in our prior or initial order. But seems we have done the
trick. Infection rates now fallen quite dramatically and if you look to the chart
to the right, what you see is Hawaii. In terms of cases per 100,000 on a rolling
seven over the past seven days is amongst the lowest in the country. So, of the
best performing states handling the virus in the country.

And, if you go across the islands, within the island chain, O?ahu performing well,
Maui performing well, Hawaii performing exceptionally well, Big Island has got a
bit of an issue with some retirement home issues. But in general, the state as a
whole is operating quite nicely from an infection control standpoint.

So finally, just � and bringing altogether, we feel we are extremely well

positioned for these most unfortunate times. This is a dynamic environment. This is
certainly an uncertain and generational sort of situation. But the company, for the
most part has been built to weather exactly these kinds of occurrences. So, as I
mentioned, I think despite these challenges, we are well positioned.

Our credit metrics are strong as Mary will share with you. We had reasonable loan
growth in the quarter. Slightly down on a spot basis, slightly up on an average
basis, but impacted by about $35 million in line pay downs and installment loan
reductions as you would anticipate. Deposits continue to grow nicely for us, up
3.5% on an average basis.

Funding cost continue to come down and I think as you�d expect of us, our liquidity
and capital levels are certainly top-notch within the industry.
So, I think I�ll stop there and I am happy that I�d kick it over to Mary who will
share some credit thoughts with you. Mary?

Mary Sellers

Thank you, Peter. At the end of the quarter, the loan portfolio, net of PPP
balances totaled $11.2 billion, and remain 60% consumer and 40% commercial, with
76% secured with high quality real estate, with a combined weighted average loan to
value of 56%.

As we�ve shared before, we believe this portfolio construction built on

conservative underwriting and disciplined portfolio management will continue to
provide a superior outcome, and allow us to continue to support our customers and
community through these unprecedented times.

Credit metrics remained strong and relatively stable in the third quarter. We
realized net recoveries of $1.5 million for the quarter as compared with net
charge-offs of $5.1 million in the second quarter and $3 million in the third
quarter of 2019.

Non-performing assets totaled $18.6 million or 16 basis points at period end, down
$4.1 million or 3 basis points for the linked period and down $3 million or 4 basis
points year-over-year.

Criticized loan exposure increased $51.1 million to $250.7 million or 2.13% of

total loans. The credit provision was $28.6 million, which was net recoveries of
$1.5 million resulted in a $30.1 million increase in the allowance for credit
losses. The reserve reflects our best estimate of losses in the portfolio, given
the company's credit risk profile, and the current economic outlook and forecast
for our market which as Peter noted, our anchored off UHERO September 25th baseline
forecast.

With the reserve build reflective of the continued uncertainty we are facing with
COVID-19 and the potential downside associated with this. At the end of the
quarter, the ratio of the allowance for credit losses to total loan and lease
outstandings was 1.73% or 1.80% net of PPP loans. And the reserve for unfunded
commitments was $2.3 million, down $200,000 from the second quarter.

At the end of the third quarter, customer loan balances on payment deferral or
extension totaled $1.5 billion or 13% of total loans. During the quarter, we
continued to receive very few new requests for payment relief. As you may recall,
we elected to provide initial payment relief of up to six months for our customers,
given the degree to which Hawaii was impacted, the provision supported under the
CARES Act and our capacity to do so.

These payment deferrals began to expire in September with customers returning to

their normal payment schedules beginning in October. This cadence will continue
through November and December. Accordingly, as of October 23rd, customer loan
balances on payment deferrals have reduced to $1 billion or 8.6% of total loans.
This is an $839 million or 45% decline from the second quarter.

69% of the consumer loans with payment deferrals as of September 30 are secured
with residential real estate with a weighted average loan to value of 61%. 85% of
commercial loans for payment deferral as of September 30 are secured with a
weighted average loan to value of 51%. 78% of the commercial loans on deferral
continue to pay interest.
Our commercial exposure to those industries most impacted by COVID-19 remains flat
for the linked period at 11% of total loans exclusive of PPP and our exposure
continues to be well positioned to weather this pandemic.

The retail segment totaled $648 million or 5% of total loans. 91% are secured with
a 55% weighted average loan to value. 96.9% is secured or extended to an essential
business. 0.9% is unsecured and deferred.

The lodging segment is $503 million or 4% of total loans. 78% is real estate
secured with a 51% weighted average loan to value and 79% have a loan to value of
less than or equal to 65%. 5.3% is unsecured and deferred.

Finishing with the restaurant and entertainment segment, this segment totals $154
million or 1% of total loans. 38% is real estate secured, with a weighted average
loan to value of 64%. $21.3 million is unsecured and deferred, with average
exposure of $500,000. 98.8% is secured or paying interest.

I'll now turn the call over to Dean.

Dean Shigemura

Thank you, Mary. As Peter stated, we are well positioned despite the challenging
environment. Although interest rates have fallen significantly and our margin
remains under pressure, our net interest income has remained relatively stable.
We�ve been able to mitigate the impact of the rate and margin pressures for the
continued growth of our balance sheet and mix change.

Balance sheet growth is being driven by strong deposits, which increased by $316
million or 1.8% linked-quarter and $2.4 billion or 15.6% year-on-year. Over the
last ten years, deposits have grown by an average of 6.2% annually.

Concurrent with the strong deposit growth, our total deposit funding cost also
continued to decline during the quarter ending the quarter at approximately four
basis points. The low cost provides us with the flexibility for growth and is a
significant contributor to our profitability. As a mitigant against the impact of
lower interest rates, we continued to reduce deposit rates as market conditions
allow.

At 66%, our loan to deposit rates remains well below peers. With a comparatively
low ratio, our solid and growing deposit base provides additional asset funding
opportunities and pricing flexibility while reducing our funding risk profile
against risk assets.

We continue to deploy a portion of that excess liquidity into our investment

portfolio and increased balances by $400 million to $6.4 billion. We maintain the
high credit quality and liquidity by adding only Triple A rated securities with
reliable monthly cash flows. Triple A rated securities represent 96% of the
portfolio balances and 100% remain A rated or better.

The duration of the portfolio was 3.54 years at the end of the quarter and well
within our risk tolerances. Thus the investment portfolio remains a stable and
secure source of liquidity and funding for our balance sheet.

Our loan portfolio has shown resilience in the phase of a difficult lending
environment. The 8.4% growth in balances year-on-year is helping mitigate the
impact of sharply lower interest rates and is enabling our stable net interest
income. Over the last ten years, loans have grown by an average of 8.5% annually.

In addition to balance sheet growth, our profitability is further supported by our

disciplined expense management. Since 2009, expenses have grown at less than half
the rate of inflation, while we are still making critical investments in people,
technology and infrastructure projects.

Throughout the pandemic, pre-provision net revenue generation remains strong and
stable, funding the dividends to shareholders, building additional reserves and
adding to our growing capital base. Our strong risk-based capital levels continued
to improve in the third quarter increasing our CET1 and Tier-1 capital ratios to
12.1%.

We added to our excess capital levels in the third quarter and continue to hold
significant amounts of capital in excess of minimum regulatory and well-capitalized
levels. These represent funds that can be deployed for further growth for loss
mitigation.

Now I�ll provide additional details on our financial results. Net income for the
third quarter of 2020 was $37.8 million or $0.95 per share. Net interest income on
a reported basis in the quarter was $124.2 million, lower by $2.5 million from the
previous quarter and lower by $700,000 from the third quarter last year.

Included in the second quarter of 2020, net interest income was an interest
recovery of $2.9 million. Excluding the interest recovery from the second quarter,
net interest income in the third quarter of 2020 increased by $400,000. As Mary
discussed, we�ve recorded a credit provision of $28.6 million this quarter.

Noninterest income totaled $41.7 million in the third quarter of 2020, down $9.5
million from the previous quarter and down $4.8 million from the third quarter last
year. Noninterest income in the second quarter of 2020 included a gain of $14.2
million from the sale of our remaining Visa shares.

Adjusted for the Visa sale, non-interest income increased by $4.6 million or 12.6%
linked-quarter, primarily due to higher deposit service fees. For the fourth
quarter of 2020, we expect non-interest income will be approximately $42 million
while noninterest income has improved, challenges remain due to lower levels of
customer activity during the ongoing disruptions from the COVID pandemic.

Noninterest expenses in the third quarter totaled $89.9 million, an increase of

$1.1 million from the previous quarter, and a decrease of $10.4 million from the
same quarter last year.

In the third quarter, occupancy expenses were reduced by $1.9 million from the sale
of properties offset by the recognition of $1.8 million of separation expenses.

Accruals for corporate incentives in the third quarter were $2.7 million and
continued to be lower than the comparable period in 20219, which was $5.7 million.
Included in the expenses for the third quarter of 2019 was an increase of $6
million to legal reserves.

For the fourth quarter of 2020, we expect our noninterest expenses will be
approximately the same as the third quarter at above $90 million. The effective tax
rate in the third quarter was 20.09%. We estimate the rate will be approximately
20% to 21% for the fourth quarter.

Our return on assets was 0.76%, the return on equity was 11.01% and our efficiency
ratio was 54.2%. Our net interest margin in the third quarter was 2.67%, down 16
basis points from the second quarter, and down 34 basis points from the third
quarter of 2019.
Adjusting for the $2.9 million interest recovery recognized in the second quarter,
which benefited the second quarter margin by 7 basis points. The margin in the
third quarter was lower by 9 basis points. The decrease was primarily due to lower
interest rates and much higher levels of liquidity due to strong deposit growth. We
expect that our net interest margin will remain under pressure and decline by
approximately 7 to 8 basis points in the fourth quarter, from the continued impact
of lower rates and additional liquidity.

Our net interest income is expected to be approximately unchanged from the third
quarter, as loan growth and asset mix change are expected to mitigate the impacts
of the lower margin.

Our estimates conservatively assume PPP loans are carried for the full 24 months.
Shareholders� equity was $1.36 billion at the end of the third quarter. During the
third quarter, we paid out $26.9 million or 71% of net income and dividends. Our
share repurchase program remains suspended.

And finally, our Board declared a dividend of $0.67 per share for the fourth
quarter of 2020.

Now I'll turn it back over to Peter.

Peter Ho

Great. Thank you, Dean. So, those are our prepared comments. We are happy to share
with you whatever questions you might have at this time.

Question-And-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ebrahim Poonawala
of Bank of America Securities. Your line is open.

Ebrahim Poonawala

Thank you. Good morning.

Peter Ho

Good morning.

Ebrahim Poonawala

I guess, the first question, if you could just talk a little bit about the
deferrals at 8.6%. Talk to us in terms of how you expect as these deferrals come
up, just from a timeline standpoint where you think this end towards the end of the
year. And within the deferred book, what�s your expectation of what percentage
actually migrates to nonperforming, particularly as it relates to the sort of the
higher COVID risk sectors?

Mary Sellers

Sure, EB. Let me start with our consumer portfolio. It was down 34% from the peak
with mortgage and home equity down 41% and 34%. Auto and indirect were down 15% and
19% respectively from the peak. In our consumer portfolio, the majority of our
deferrals in mortgage and home equity were pretty equally done such that we have
40% maturing and � or returning to payment on October. 40% in November and then,
10, 10 through the balance of the year.

On direct and indirect, that had a little different cadence. So we only had about
10% to 20% coming off of deferral and moving to payment on October. So we are a
little earlier into that process. So that will move about 40, 40, 20 through the
balance of the year. You know the results to-date have been positive, but I think
it�s a bit too early to really draw any conclusions and we�ll really want to take a
look at the data this month to see how that�s playing out.

On the commercial front, we are down to $480 million, which is down 55%. The
secured piece was down 56% from the peak and the unsecured is 52%. Our outlook
fairs that we�ll continue to see some payoffs through the end of the year, probably
dropping maybe another $100 million. But we are continuing to support our customers
and offering additional deferrals, primarily principal deferrals.

And this just really is to partner with them as they�ve had to draw on their own
liquidity and capital to carry the negative and have done so and we feel it�s
appropriate that we assist and given the low leverage on these assets, it makes
sense.

Peter Ho

Yes. That�s a really good point, Mary. I mean, I think, just to add a little color
to Mary�s commentary, Ebrahim, we are down from $2 billion in mid-year to $1.5
billion quarter end and as Mary pointed out 992 actually as of the few days ago.
Our expectation is, that number will continue to drop. But underlying all of that,
our clients that we have and have had for a long time who experienced an
extraordinary situation and so our goal is to be able to support them, obviously
within the balance of our capital and reserving capability which we feel very good
about. So, I have my own sense is that, this was actually going quite well. We, as
you know, have been building reserves towards this. We see somewhat the light at
the end of the tunnel around that and on the client side, for their part, they�ve
been dutifully bringing that number down. But we are going to get to a point where
that represents the truly deferred population set and our goal would be able to �
to be able to support them by virtue of the cycle we�ve built the capital around
them to do that.

Mary Sellers

Ebrahim, I would also share with you that in the high risk industry exposure, our
deferral population was down 42% from the peak. And the majority of that remains
secured. On 22% of that is unsecured.

Ebrahim Poonawala

Got it. So, I guess, safe to assume that as you work with your borrowers, some of
the mean � many deferrals extend beyond year end. Is that the right way to think
about it?

Peter Ho

I would imagine with unemployment 5x where it was pre-COVID, that�s probably a high
likelihood.

Ebrahim Poonawala

Understood. And times of flights showing the daily arrivals, when you think about
the actual � you gave some overview of the local economy, Peter, but as we think
about the reopening of tourism, the hotels, like, do you expect like, a few weeks
from now, all the properties should be opened kind of � what�s going on in terms of
your customers and your lodging and restaurant customers at least opening back up
over the next few weeks?

Peter Ho

Yes. Good question. So, we � and I have been in pretty consistent conversation with
that sector � that emerging sector and a lot similar commentary. I think people are
- obviously because of the fits and starts with the reopening over the summer,
where people are following out is they took a bit of a wait and see attitude. So,
we are reopened. Most folks that I talk to are looking to be open kind of early
into next month, if you will. So, I think that bodes well for arrivals for us. We
are running right now at about 20% of what we used to run in a normal environment.
And most of the hoteliers that I speak to are pointing to see if we can get that
number more the 50%-ish that begins to allow them to operate with some semblance of
� in the black, if you will. So that would be the near-term goal. And I think most
of them would say, it�s going to take maybe another year on top of that to get back
to the good old days.

Ebrahim Poonawala

Understood. And if I can sneak in one last one for Dean, thanks for spelling out
the fourth quarter guidance. Just as we think about the securities book being, just
talk to us about the pressure on that front on the average yield was about 195 in
the book in the third quarter. What are a new securities coming in that and what�s
the outlook for cash that�s coming up for maturity over the next, I guess, one
year?

Dean Shigemura

Yes. So the new yields coming on are about, call it, 1% to maybe 1.25%. So quite
low versus what�s running off and the differential in the last quarter was about
1.5%. So we would expect that to continue to the foreseeable future in terms of the
low rates. In terms of liquidity, the portfolio does have a pretty high run-off of
increase this quarter. I think you saw in the presentation, last quarter it was
$9.1 million versus the index, in terms of premium amortization, versus the 7.5.
So, I would expect the cash flows coming off in the fourth quarter maybe until next
year to be a little bit elevated, but that gives us a lot of liquidity, continued
liquidity and we�ll be probably reinvesting a good portion of that back into the
portfolio.

Ebrahim Poonawala

Got it. Thanks for taking my questions.

Peter Ho

Sure.

Operator

Thank you. Our next question comes from the line of Jeff Rulis of D. A. Davidson.
Your question please.

Jeff Rulis

Thanks. Good morning.

Peter Ho

Hey Jeff.

Jeff Rulis

A question on the migration trends to the island just in and out of the state and I
guess is that what�s part one and then, two, as it relates to I think your mortgage
outlook for 2021.

Peter Ho

So, expand for me the migration question, Jeff.

Jeff Rulis

Yes, just more recent flows of folks moving to the state permanently or in or out
just how that?

Peter Ho

Yes. Yes. So that has been for three years now somewhat of an issue. So, net
domestic migration has always been slightly negative, I�ll call it a couple
thousand per year. So that�s the number of folks leaving the islands to the U.S.
mainland and number of people from the U.S. mainland coming to the islands to live.
In the last three years, we are seeing that expand to 10,000, 12,000, 13,000,
14,000, 15,000 people. The sense we had around that was prior to COVID that that
really reflected the high housing cost out here. And so, that�s the condition that
existed pre-COVID, coming out of COVID, we�ll have to see what happens. I think
obviously, economic conditions will be somewhat different, but at the same time,
housing prices might be different as well though that�s not burying out in the
statistics right now.

Interesting side note on migration from the mainland is, at the very top-end of the
market, and this is mostly anecdotal, but I�ve heard this and seen this enough to
think that there is a trend there. We are seeing a number of high end potential
residents looking to make way, a place to hang out in the kind of work through I
guess, the COVID era if you will and I can tell you just from my own experience
just from the neighborhood that I frequent, you definitely see that phenomena
happening.

Jeff Rulis

Got it. And it�s kind of really narrow, but it could narrow that into the mortgage
outlook for 2021 somewhat related. But those are big picture just trying to get a
sense for the mortgage.

Peter Ho

Yes. Mortgage is going to be � I think, mortgage is going to be a largely a refi

phenomenon. As you know, the VA side is absolutely white hot. So I�d just read the
mortgages of the world are running rough shot. The purchase side is, it�s first
thing as well. But Hawaii is an inventory constrained marketplace. I think, if we
were a different market, we�d be selling every home nail down the ground that we
had.

But there is a strong lot of homes to buy. So, I think that, we believe our
forecast is that mortgage will continue to be strong, but mostly in the refi space.
And most of that�s just because we just don�t have that much inventory out here.

Jeff Rulis

Yes. Yes. Okay. And maybe one last one. Peter, certainly the bank has been kind of
ahead of the curve on the � through the branch to digital shift and as you see the
industry accelerate in kind of remote working world, does that change the pace of
what you, kind of your own course of action? Do you accelerate that plan or maybe
just an update on kind of that move as it is?

Peter Ho

Yes. That�s definitely front and center of a lot of the things we are thinking
about right now, Jeff. And what we�ve seen is, a pretty dramatic shift. I mean, we
have discussed this. We�ve seen for years now a meaningful shift towards digital
away from in person branch. COVID has really accelerated that. So, I can share with
you that year-to-date, our branch transactions are down, call it 50% and a lot of
that is just people changing behavior as they kind of refigure their daily lives
because of the virus.

Now, what that�s helped to do is, move things like deposits, consumer deposits into
other channels, albeit electronic channel. So, for instance, in August 2019, 61% of
our deposits were coming through our branches, fast forward to this past August,
that number is down to 47%. So, we think that that is a trend that is going to
continue.

The question is, once we come out of COVID we are out of this crisis, what will the
bounce back factor be? So I guess, the way that we are thinking about it is, we
were already down in the past of trying to create a more efficient physical
presence. I think this has accelerated that to a certain degree. But what we are
trying to figure out at this point is, if branch volumes are down 50%, what�s the
bounce back factor?

But sales bounce back factor is plus 50% from that down 50% that still gives you
kind of a net net 25% reduction in overall activity. And certainly some of that we
need to be processing around. Just to finish off the thought, we are very happy
with our investments on the commerce side, because, obviously because of the
reduction in branch activity.

Traditional branch sales are just off meaningfully, but those for the most part
have been offset by our ecommerce sales down our mortgage in consumer loan and
consumer deposit opening activities. So, generally a good story.

Jeff Rulis

Okay. Appreciate it. Thanks.

Operator

Thank you. Our next question comes from the line of Jackie Bohlen of KBW. Your
question please.

Jackie Bohlen

Hi. Good morning, everyone.

Peter Ho
Hey, Jackie.

Jackie Bohlen

Just as a follow-up to Jeff�s question and understanding that you�ve obviously got
a lot under review right now. What are some of your preliminary thoughts and how we
should be thinking about the expense structure in 2021?

Peter Ho

Yes. So, there are some hopeful thoughts there and then there are some longer term
strategic plans that we hope just line up nicely for us there, Jackie. And so, one
of the expense drivers this year has been � frankly been pretty draconian on the
variable comp side. So, our hope is that, as provisioning moderates and as
operating volumes return to somewhat more normal conditions, that number should
obviously pull up a bit, right.

So that�s going to create a delta for us, at least versus what we are doing this
year. And what we would anticipate to and what we�re thinking through is, what are
the base operating opportunities that we have at our disposal. So, Jeff touched and
asked about the branch side, branch real estate, that clearly is an opportunity for
us.

As you know, that�s not something that�s come about just because of COVID, but I
think it�s being accelerated because of COVID. And then we also have a number of
efficiency initiatives that are being brought about by just better process design
and management, as well as by some technology and automation capabilities that we
are getting underway on.

So, I think the best way to think about it is, if you look at our long-term expense
slope, you know that we�ve been able to really draft below the overall rate of
inflation, while still provide for future investment and we would expect to
continue to be on that path forward for a number of years to come.

Jackie Bohlen

Okay. Great. Thank you for the additional comments there. If I look at deposits,
just curious and this ties in with balance sheet size as well, I know the fact the
commercial decline was typically offset with consumer and public. And just wanted
to see what your appetite is for public deposits and if that was just a function of
an opportunity you saw? Or if you are trying to maintain balance sheet growth to
offset margin pressure which you kind of alluded to earlier?

Peter Ho

Yes. Well, so, let me talk about the numbers first and then I�ll come back to the
strategy, if that�s okay with you. The numbers � because we have so many kind of
stimulus type dollars, large dollars bouncing around with some of our larger
commercial clients, Jackie, kind of the spot point to point numbers can be a little
misleading.

So, now more than ever, we are looking at average balances and if you look at that,
for the quarter, we are up 2.3% on an average deposit basis. Consumer was up 3%.
Commercial was up 6.4% and actually government was down 7.5%. So that gives you the
snapshot for the quarter itself. In terms of our strategy around the government
deposit sector and I guess, more specifically the time sector, pricing has again
gotten awfully attractive there.

And as we�ve described in the past, when rates are very low, the municipalities
tend to go with the local players,
I think they prefer to do that and
which I think by anybody�s book is
more competitive and more national
attractive to us.
just because that�s an easier form of execution.
we can get pricing in the single-digit range,
pretty attractive. As rates rise, things become
competition and then that becomes less

So, I think, while we are in this rate zone, we will opportunistically be in and
out of the government time sector. But just as a broader backdrop, where we really
try to build our deposit franchise is not so much there, but really more down the
core commercial and consumer front.

Jackie Bohlen

You know, definitely understood in terms of that. And thank you for the average.
That was very helpful. Okay. Thank you. All the best.

Peter Ho

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Andrew Liesch of Piper Sandler.
Your question please. Mr. Liesch, please make sure your line is unmated and if you
are in a speaker phone, lift the handset.

Andrew Liesch

I apologize. Good morning. Just wanted to follow-up � do you hear me?

Peter Ho

Yes. Yes.

Andrew Liesch

Okay. Sorry. Just wanted to follow-up on the margin and clear discussion and
certainly forecasting out the level of � the high level of liquidity can be
challenging. But, why are � I mean, I recognize margin will be down a bit more here
this quarter. Where do you guys think that ultimately ends up bottoming out before
kind of plateau, or I guess reaching a trough?

Peter Ho

Yes. Looking into next year, probably towards the end of the year, but the pace of
the decrease will decelerate. So, we are looking at probably in the fourth quarter
of next year where we will bottom out. But again, the pace of decreasing of margin
will slow.

Andrew Liesch

Okay. That�s helpful. And then, on the credit front, the rise in criticized loans,
just curious what was driving that? Is there anything amongst the deferrals or
among certain borrowers back or there could be some pause at this time?

Mary Sellers

We did have a bit of an increase in our high risk industry exposure. They commit
for about 42.7% of that. Our high risk industry exposure is, or criticized exposure
is 79% secured and it has a weighted average LTV at 59%.

Andrew Liesch

So that�s about 2.5% right now?

Mary Sellers

Yes.

Andrew Liesch

Yes. So it�s still well below regulatory�

Mary Sellers

Yes. It�s two points.

Peter Ho

And then, still very low I would �

Mary Sellers

Very low. Yes.

Andrew Liesch

This time what might be nice driving that increase. And then, just one more on the
fee income, I mean, how much of this is driven by � of the increase here of like of
any reopening and as the state does have more reopening in tourism that�s come back
a little bit opportunities for other sorts of consumer transaction-related fees. I
mean, do you think there is opportunities for that to improve next year as activity
rebounds?

Peter Ho

Yes. So, the increase in those fee line items that you reference, definitely was
driven by resumption of local economy traffic. A good graph to look at, as we go to
the UHERO site, they have a � what they call an economic pulse, which takes a whole
bunch of high frequency data and amalgamates it. And that actually is now up to its
highest level since the crisis hit. So we think that�s what we are seeing just kind
of an enhanced activity and we would hope, Andrew, that if and as the visitor
rearrivals to the islands, helps push the economy forward which you�ve seen more of
that trend line happen.

Andrew Liesch

Okay. Great. I appreciate all the color. Thanks for taking my questions.

Peter Ho

Okay. Take care.

Operator

Thank you. Our next question comes from the line of Laurie Hunsicker of Compass
Point. Please go ahead.
Laurie Hunsicker

Thanks. Good morning. Just wanted to go back to Jackie�s question on just looking
at the public deposits. Do you have a break down as to what the time is within that
$1.675 billion number? And just maybe a little bit about your strategy on public
time?

Peter Ho

I don�t have a break out per se only, Laurie.

Laurie Hunsicker

Okay. I�ll circle back maybe, just generally, and again, rates are obviously very,
very low, but how you are thinking about specifically the public time here?

Peter Ho

Yes. Specifically, we think of the � it�s kind of � it depends on what part of the
cycle you are asking us. And in general, I�d say that they don�t really represent a
strategic part of our deposit business. But there are times when rates are so low
that their pricing is so benign is there is kind of silly enough for us to take
that opportunity and that�s kind of where we are right now. We are squarely in the
low-single-digit range right now, Laurie. And so, yes, if a local treasurer calls
us and says, would you like to take this money for a period of time, generally the
answer to that is going to be yes. So, I think where we are trading right now is
somewhat opportunistic. But just in the broader sense, public space and the time
space in particular is not really where would be trying to push the deposit
portfolio into.

Laurie Hunsicker

Okay. Okay. Great. And then, Mary, a question for you, just hoping we could go back
over. I appreciate the October 23rd update. So, obviously commercial here dropped
$837 million, I am just talking deferrals, $837 million from September 30, down to
$480 million at October 23rd. Do you have a break down either by percentage or
dollars, what the retail, lodging and restaurant is for deferrals as of October
23rd?

Mary Sellers

I do. Okay. As of October 23rd, the retail deferrals would be $80 million with $75
million of that in secured exposure with a 51% LTV. The lodging exposure is $166
million, $140 million of that is secured at 39.8% and our restaurant and
entertainment was $42.5 million with $10 million secured at 47% LTV and $32 million
unsecured.

Laurie Hunsicker

Okay. That�s great. That�s very helpful. And then, just one other question, just
shifting gears. On your PPP loans, do you have an update in terms of as of
September 30, what the processing fee income would be? In other words, as of last
quarter, round numbers that was $18 million or so on your book. Just trying to get
a sense of � just certainly have loan forgiveness, where that number stands
currently?

Peter Ho
Well, the way to think about it is, if we take the $18 million and you divide it by
eight quarters, that�s how much we would amortize into the yield every quarter.

Laurie Hunsicker

Okay. Okay. So just understood. Thanks again. Okay. That�s helpful. Great. Thank
you. I�ll leave it there.

Peter Ho

Thanks.

Operator

Thank you. Our next question comes from Casey Haire of Jefferies. Your line is
open.

Elan Zanger

Hey. Good morning. This is Elan Zanger on for Casey.

Peter Ho

Hi, Elan.

Elan Zanger

Starting with the resi mortgage yields, they were up a couple basis points. What
drove that? And where is some of the new product coming on that and at what
pricing?

Peter Ho

Yes. In terms of the yield, what�s happening is, as � because we have a lot of refi
or prepayment activity. What we do is, we then get to � this is kind of a more of a
technical response, but as we do get to recognize a lot of the loan fees into the
yield, so that�s what�s driving some of the yield increases. In terms of what�s
coming on, right around slightly less than 3% is where they are coming on.

Elan Zanger

Okay. So, you are just pulling in more of the fee instead of kind of amortizing it
out over a longer period. Is that how I should understand it?

Peter Ho

Yes.

Elan Zanger

Okay.

Peter Ho

It�s coming of loans and it�s coming off terms.

Elan Zanger
Right.

Peter Ho

Because there has been refi, so somewhat seeing it.

Elan Zanger

Got it. And then, just back to the NIM guidance, could you just remind us what it
contemplates in terms of cash balances for the fourth quarter and growth in
securities?

Peter Ho

So, the cash right now we are at, call it, $800 million and securities was 6.4. So
we are probably going to deploy some of that back into the portfolio. And that�s
what�s going to help us stabilize the net interest income.

Elan Zanger

Okay. And then, just last one from me on the tax rate, if the corporate tax rate
goes to 28% like many things might happen, where could BOH - what range could BOH
settle out in?

Peter Ho

It�s hard to say right now, because of just where we � the tax rate, right now it�s
pretty low at 20%. So I would � I don�t want to give a number, because we haven�t
really kind of delved into exact impacts of what a higher rate would do to us.

Elan Zanger

Okay.

Peter Ho

Yes.

Elan Zanger

That was it for me. Thank you guys.

Operator

Thank you. And as there are no more questions in queue, I�d like to turn the call
back over to Cindy Wyrick for closing remarks. Ma�am?

Cindy Wyrick

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

Thanks, everyone. Have a good day.

Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for
participating. You may now disconnect.