Bank of Hawaii Corporation (BOH) Q2 2022 Earnings Call Transcript

Bank of Hawaii Corporation (NYSE: BOH) Q2 2022 earnings call dated Jul. 25, 2022

Corporate Participants:

Jennifer Lam — Executive Vice President, Treasurer and Director of Investor Relations

Peter S. Ho — Chairman, President and Chief Executive Officer

Dean Y. Shigemura — Vice Chair and Chief Financial Officer

Mary E. Sellers — Vice Chair and Chief Risk Officer

Analysts:

Andrew Liesch — Piper Sandler — Analyst

Kelly Motta — Keefe, Bruyette & Woods — Analyst

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

Jeffrey Rulis — D.A. Davidson & Co. — Analyst

Presentation:

Operator

Good day, and thank you for standing by. Welcome to the Bank of Hawaii Corporation Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker, Jennifer Lam, Executive Vice President, Treasurer and Director of Investor Relations. You may begin.

Jennifer Lam — Executive Vice President, Treasurer and Director of Investor Relations

Thank you. Good morning, good afternoon, everyone. Thank you for joining us today.

On the call with me this morning is our Chairman, President and CEO, Peter Ho; our Chief Financial Officer, Dean Shigemura; and our Chief Risk Officer, Mary Sellers.

Before we get started, let me remind you that today’s conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, there are a variety of reasons the actual results may differ materially from those projected. During the call, we’ll be referencing a slide presentation as well as the earnings release. A copy of the presentation and release are available on our website, boh.com, under Investor Relations.

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

Peter S. Ho — Chairman, President and Chief Executive Officer

Thanks, Jennifer, and good morning, everyone.

Bank of Hawaii produced solid performance for the second quarter of 2022. Core loans grew at a higher linked rate than the prior quarter for the fifth consecutive quarter. Deposit growth was on target. Our deposit base, which is 92% core consumer and commercial by customer type, and 94% core demand and savings by product type is well positioned for rising rates.

We’re clearly seeing the benefits of our strategic investments in both our consumer and commercial businesses through increased production. Margins expanded, efficiency increased and credit statistics improved in the quarter. I’ll spend the next few minutes sharing with you conditions at Hawaii, our predominant market and then turn the call over to Dean to cover the financials. Mary will then cover credit in depth.

Hawaiian economy continues to improve as tourism and overall business activity improve. Here you see unemployment at 4.3%, hovering just over at the national levels. This compares favorably to the 7.7% differential that existed early in the pandemic between Hawaii and the U.S. mainland from an unemployment standpoint. On the real estate front, sales activity cooled in June versus prior year levels on Oahu, although sales prices actually increased from prior year levels for both single-family homes, up 12% and condominiums up 16%.

Month supply of sale housing inventory remains at suppressed levels at 1.5 months of inventory for single-family homes and 1.6 months for condominiums. Of note, current inventories are down 53% for state and single-family homes and 46% for condominiums as compared to pre-pandemic June 2019 inventory levels on Oahu. The visitor industry continues to improve, with the month of May at 91.6% of 2019 levels by arrival, and 110.6% of 2019 levels by visitor spend. Year-to-date numbers are 85% and 102.3% of 2019 arrivals and spend levels. This performance comes despite less than half of the international market. Traditionally, 35% of our visitor market having yet to return as of yet. Obviously, strong support from U.S. visitors is making up for — picking up meaningfully for the shortfall. RevPAR levels across the state are actually ahead of 2019 levels as demand for travel and specifically traveled to Hawaii remains high.

And now let me turn the call over to Dean to share the financial highlights. Dean?

Dean Y. Shigemura — Vice Chair and Chief Financial Officer

Thank you, Peter.

Our strong core loan growth continues in the second quarter. Core loans, net of PPP paydowns, increased by $434 million, or 3.5% linked quarter, and by $1.4 billion or 12.1% year-over-year. Growth was balanced across both commercial and consumer loan portfolios at 3.3% and 3.6% linked quarter, respectively, and 11.7% and 12.4% year-over-year. Core loan growth has accelerated over the last several quarters with double-digit annualized growth rates well above recent annual averages. As Mary will discuss later, growth was achieved while maintaining our conservative underwriting and disciplined portfolio management practices, with our commercial and consumer loan portfolios remaining predominantly real estate secured.

Deposits increased by $310 million, or 1.5% linked quarter, providing a solid source of low cost funding in a rising rate environment. We maintained our deposit pricing discipline during the quarter with average deposit costs of 7 basis points, an increase of just 2 basis points. We also maintained our attractive and stable core deposit base, with 94% of total deposits in checking and savings accounts. 92% of deposits are from core commercial and consumer customers and the remaining 8% in public deposits are predominantly government operating accounts.

The quality of our deposit base is further demonstrated by the longevity of our deposit relationships with our customers. Nearly three quarters of our deposit customers have been with us for over 10 years and nearly half for more than 20 years. Non-interest income in the second quarter was $132.9 million. Interest income included $500,000 from PPP loans, and we recognized $1.1 million in interest recoveries. Adjusting for these, our core net interest income was $131.3 million, up $7.9 million or 6.4% from the first quarter. Compared to the year earlier second quarter, core NII increased by $15.3 million, or 13.2%.

Our core net interest margin increased by 13 basis points linked quarter to 2.44%. Our robust and consistent loan and deposit growth provides the foundation for sustainable growth in our NII and margin, which are being further bolstered by increasing interest rates. Our loan-to-deposit ratio remains low relative to regional and local peers. This affords us room to continue to grow our assets as well as greater pricing flexibility.

As we continue to grow, we maintained our balance sheet’s assets sensitive position to changes in interest rates, and continue to benefit from higher rates. 60% of our earning assets will reprice or turnover in the next two years. In addition, sizable cash flows from both loan and deposit portfolios will also enable us to position the balance sheet for evolving interest rate environments.

In the second quarter of 2022, net income was $56.9 million, and the earnings per common share was $1.38. Net interest income in the second quarter was $132.9 million. As discussed earlier, core net interest income, which excludes PPP loan interest income, and the quarter’s interest recoveries was $131.3 million, up $7.9 million linked quarter, driven by strong core loan growth and rising interest rates.

As Mary will discuss, we recorded a negative provision for credit losses of $2.5 million this quarter. Non-interest income totaled $42.2 million in the second quarter, down $1.4 million from the first quarter. The decrease was primarily due to lower mortgage banking income and swap revenue, partially offset by higher service charges and other transactional fees.

We expect non-interest income will be approximately $41 million to $42 million in the third quarter, as higher transaction fees are expected to offset continued pressures on mortgage banking income and asset management fees. Included in the third quarter’s estimate is a one-time negative adjustment of approximately $900,000, or a change in the Visa Class B conversion ratio, which is reported as a console revenue item in investment securities gains and losses.

In the second quarter, we were able to maintain overall expense discipline while continuing with our innovation investments. Non-interest expense in the second quarter totaled $102.9 million, down $1 million from the first quarter. Included in the first quarter’s expenses were seasonal payroll taxes and benefit expenses of $3.7 million related to annual incentive payouts made during the quarter.

Adjusting for these items, the second quarter’s expenses increased by $2.7 million linked quarter, primarily due to annual merit increases and one-time cost of living adjustments, which began on April 1, as well as one extra workday during the quarter. Our innovation investments continued during the quarter, while we were able to take advantage of opportunities to reduce expenses elsewhere.

For the full year of 2022, expenses will be approximately $415 million as inflation continues to pressure overall expenses. In addition, the third quarter expenses will be slightly higher than the fourth quarter due to seasonal payroll differences between the quarters. Our return on assets during the second quarter was 1.0%. The return on common equity was 18.19%, and our efficiency ratio was 58.8%.

Our net interest margin in the second quarter was 2.47%, up 13 basis points from the first quarter. As discussed earlier, core margin was 2.44%, also an increase of 13 basis points linked quarter. The increase in the margin during the second quarter reflects the ongoing impact of strong core loan growth and rising rates. We expect continued improvement in our core margin with an increase of 6 basis points to 7 basis points in the third quarter.

Our capital levels remain strong, and we are well positioned to support continued growth. Our CET1 and total capital ratios were 11.66% and 14.14%, respectively, with a healthy excess above regulatory minimum well capitalized requirements. Despite robust loan growth, our risk weighted assets relative to total assets are still well below levels of peers, reflecting our lower risk profile and providing us with ample room to continue growing while maintaining strong capital levels.

Higher interest rates in the third quarter negatively impacted the valuation of our available-for-sale securities portfolio, resulting in an AOCI adjustment and a reduction in our book and tangible common equity. However, this had no impact on our regulatory capital and capital distribution capabilities. During the quarter, we paid out $28 million, or 51% of net income available to common shareholders in dividends and $2 million in preferred stock dividends. We repurchased 131,000 shares of common stock for a total of $10 million. And finally, our Board declared a dividend of $0.70 per common share for the third quarter of 2022.

Now I’ll turn the call over to Mary.

Mary E. Sellers — Vice Chair and Chief Risk Officer

Thank you, Dean.

Our loan portfolio construct reflects our strategy of lending in markets we understand, people we know and communities we trust. These underpinnings coupled with consistent, conservative underwriting and discipline portfolio management result in a loan portfolio that is diversified by category as appropriately sized exposures and is 80% secured by quality real estate with a combined weighted average loan-to-value of 56%.

Credit performance continued to improve and remain very strong in the second quarter. Net loan and lease charge-offs were $600,000, or 2 basis points of average loans and leases annualized, compared with 5 basis points in the first quarter and 4 basis points in the second quarter of last year. Non-performing assets totaled $15.5 million, or 12 basis points at the end of the quarter, down 4 basis points for both the linked period and year-over-year. All non-performing assets are secured with real estate with a weighted average loan-to-value of 58%.

Loans delinquent 30 days or more remained stable at $27.5 million or 21 basis points, while down $2.2 million or 4 basis points year-over-year. And criticized loan exposure represented just 1.3% of total loans, down 30 basis points from the prior quarter driven by continued sustained improvement in the financial performance of those customers who had been most impacted by COVID.

The quality of our loan production in the second quarter remained strong. 76% of commercial production was secured with quality real estate modestly leveraged. Our commercial mortgage production had a weighted average loan-to-value of 63%, and construction production had a weighted average loan-to-value of 61%. 78% of the quarter’s consumer production was secured with real estate, again, conservatively leveraged. Residential mortgage and home equity production had weighted average loan-to-value and combined weighted average loan-to-values of 65% and 58%, respectively.

76% of our home equity production was in a first-lien position. FICO scores for all our consumer production remained very strong and consistent. Portfolio monitoring metrics also remained very strong. Our commercial mortgage and construction portfolios have weighted average loan-to-value of 57% and 63%, respectively. Residential mortgage and home equity portfolios have weighted average loan-to-values or combined LTVs of 57% and 52%, respectively. 72% of the home equity portfolio is in a first-lien position, and again, monitoring FICOs remained very strong.

As Dean noted, we recorded a negative provision for credit losses of $2.5 million this quarter. This included a negative provision for the allowance for credit losses of $2.9 million, which with net charge offs reduced the allowance by $3.5 million to $148.5 million, or 1.15% of total loans and leases. The decrease in the allowance reflects the improving economic outlook and forecasts for our markets, coupled with our credit risk profile, while continuing to consider the broader economic uncertainty and downside risks of a recession. The reserve for unfunded commitments was $5.6 million at the end of the quarter, up $400,000 for the linked period.

I’ll now turn the call back to Peter.

Peter S. Ho — Chairman, President and Chief Executive Officer

Thanks, Marry.

As you can see, it was another solid quarter for Bank of Hawaii. We remain well positioned for whatever market and economic conditions present in the near future. We remain as always committed to the principle of consistency, conservatism and capital efficiency as highlighted in the chart on your screen.

And now we’d be happy to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Andrew Liesch with Piper Sandler. Your line is open. Thanks.

Andrew Liesch — Piper Sandler — Analyst

Thanks. Hi, everyone. Thanks for taking the questions. Peter, just want to start on the loan side here. You referenced the challenged housing supply. Just kind of curious what’s driving that growth, along with the home equity growth? And then where does the pipeline stand on the commercial side as well? You continue to put up really good loan growth. So just curious where pipelines stand and what is driving this growth that you guys are able to put up?

Peter S. Ho — Chairman, President and Chief Executive Officer

Yeah. So, I think I just threw a bit of a comment on the — on my opening remarks around really some of our strategic efforts, really, I think, showing up nicely in this quarter, Andrew. So maybe beginning with the commercial side, what we saw, commercial wise, was all of our growth, for the most part, came out of our middle market small business units. And I think, as you know, that’s really traditionally bank where it’s considered more of a large corporate lender. And really in the past five years, I’d say, they’ve really begin to emphasize building up that kind of that mid market small business segment. And in this quarter, basically, large corporate was flat in loan production. But our small business unit, middle market unit generated about 7% loan growth, which kind of got us that 3% number. So that obviously, it was very satisfying to us as we’ve been building this area.

We’ve staffed up our middle market about 45% with lenders and support staff over the past couple of years. And I’ve been fortunate to pick up a number of real well-known lenders in their particular marketplaces, which has had a big impact as well. So really, the strategic growth is, as a result of now really having really two businesses, a large corporate business that is going to grow and has grown nicely, but just kind of had an off quarter this quarter. But our middle market business really taking shape and having a great quarter this quarter, and hopefully, they’ll both have good quarters next quarter. But you know, I think the point is, if one falters a little bit, the other one generally tends to pick up. And that’s what we’re starting to see in the consistency of our commercial numbers over the past several, several quarters.

On the consumer side, yeah, the run up in rates, obviously, has had an impact on our mortgage businesses; home equity and residential. But a lot of the growth you saw for Q2 was kind of backlog or pipeline that had been built prior to some of that rate increase. So, we think that we will likely see a downturn in application volumes, certainly in residential mortgage, probably in home equity as well, although I would say that as people are hesitant to refi first mortgages on a cash-out refi basis, that tends to push business to home equity, as well as incent people with existing home equity lines to fund up their existing lines. But overall, I think we remain pretty constructive on loan growth at least for the next couple of quarters out.

We see continued loan growth in consumer, continued long growth in commercial, consumer really being driven by — despite kind of some headwinds in the rate market and the pipeline really being offset, if you will, by a number of channel improvements that we’ve made over the past couple of years online, wholesale, private banking. Those are all — those are all market vectors that really haven’t been available to us in the past that are really starting to show some level of scale at this point and giving us nice growth despite potentially a drop-off because of rate.

Andrew Liesch — Piper Sandler — Analyst

Got it. That’s really helpful. Thanks for that detail. And then, Dean, just on the margin outlook, you mentioned 6 basis points to 7 basis points in the third quarter. What are some of the assumptions behind that? Does that assume a rate hike next week, or I mean, later on this week? And why wouldn’t that extension be stronger given that we just had a 75 basis point rate hike just last month?

Dean Y. Shigemura — Vice Chair and Chief Financial Officer

Yeah. So, we’re assuming 75 basis points for this week, and then maybe another 50 basis points after that sometime in the third — this quarter. So it is based on kind of a flattish to maybe even a little bit around 3% on the 10 year and then continued loan growth. So that’s how we got to that number.

Andrew Liesch — Piper Sandler — Analyst

Got you. Are you seeing rising funding costs that might slow that — slow the pace of expansion?

Dean Y. Shigemura — Vice Chair and Chief Financial Officer

A little of that, but mainly, it’s going to be kind of a flattish on the long end. But we’re continuing to realize some benefits on that. But the benefits from that will just continue throughout the next several quarters and years. The short end is a little bit more instantaneous. So, that’s how we got to the 6 basis points to 7 basis points.

Andrew Liesch — Piper Sandler — Analyst

Got it. All right. Well, thank you for taking the questions. I will step back.

Peter S. Ho — Chairman, President and Chief Executive Officer

Great. Thank you, Andrew.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Kelly Motta with Bank of America [Phonetic] [sic] [KBW]. Your line is open.

Kelly Motta — Keefe, Bruyette & Woods — Analyst

Hi. This is Kelly Motta with KBW.

Peter S. Ho — Chairman, President and Chief Executive Officer

Yeah, whatever you want, Kelly.

Kelly Motta — Keefe, Bruyette & Woods — Analyst

Okay. Thanks for the question. Great quarter. I’m just wondering this may be a question for Mary. Peter, you mentioned that in the prepared remarks, credit metrics across the board are good, with the tick down in criticizing delinquencies. Just wondering if there’s anything that you may be watching a bit more closely that isn’t showing up necessarily in recorded credit metrics yet?

Mary E. Sellers — Vice Chair and Chief Risk Officer

Actually, no, we’re not really seeing any early signs of any deterioration. Of course, we have our eye on our consumer book, given the impact of rising rates and inflation. But everything still looks good there. In our commercial portfolio, our client base is very strong financially. And as you can tell from the metrics, have a lot of financial capacity and depth to weather this, but we’re continually really streaming through that to see if there’s any segment we should be more concerned about.

Kelly Motta — Keefe, Bruyette & Woods — Analyst

Got it. Thanks for the color. And then turning to funding costs — back to funding costs. With the increase you saw this quarter, it looks like there was also an increase in public deposits. Can you just remind me what’s the seasonality with those are, as well as if we were going to kind of parse them out [Phonetic]? I assume those are a bit higher costs or repriced a bit faster. How your core deposit base performed in terms of changing costs this quarter?

Dean Y. Shigemura — Vice Chair and Chief Financial Officer

Yeah. So just to kind of start at the top of seasonality in public deposits, we do have a bump in February and August. That’s mainly due to property tax receipts. So, those come to us mostly. And then, in terms of costs, we did increase some of the balances on our public side. What we saw is that the — with the rising rates, market rates, we were able to pick up some public deposits at a lower cost than our funding costs. So, we thought that was an attractive move for that. And overall, what we’re seeing is still a pretty muted deposit rate environment locally. The kind of the — no one has a increase of public or published rates, I should say, locally. There are some movements at the very top end of the market, but that’s to be expected. And that’s well within our plan.

Peter S. Ho — Chairman, President and Chief Executive Officer

Yeah. Kelly, we see the — I mean, with mega rate increase one in the books, pretty good discipline in the marketplace. As Dean indicated, you’re always going to have some extraordinary large depositors who quite rightfully are going to ask for more yield. And that’s to be expected, I think. But in general, the broader deposit marketplace is feeling pretty good. Now, we’ve got likely another 75 basis point increase coming through shortly. And our hope is that kind of likely yields will have to lift a bit, but still, hopefully in a disciplined manner.

Kelly Motta — Keefe, Bruyette & Woods — Analyst

Got it. I appreciate all the color here. I will step back.

Peter S. Ho — Chairman, President and Chief Executive Officer

Thank you, Kelly.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Laurie Hunsicker with Compass Point. Your line is open.

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

Yeah. Hi. Thanks. Good morning.

Peter S. Ho — Chairman, President and Chief Executive Officer

Hey, Laurie.

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

Just staying with where Kelly was on public deposits, the 647 billion [Phonetic]. How much of that was time? And then if you have a comparable number in terms of last quarter’s billion [Phonetic], how much of that was time?

Peter S. Ho — Chairman, President and Chief Executive Officer

Public times, Laurie?

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

Yeah.

Peter S. Ho — Chairman, President and Chief Executive Officer

Yeah. So it’s kind of lumpy as Dean alluded to, but this quarter public time was 420. Last quarter, public time was 25. And the quarter last year, so 6/30/21 our public time was 348.

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

Okay. Got it. And do you have a — do you have a blended cost on your — on all of your public deposits that you could share with us?

Peter S. Ho — Chairman, President and Chief Executive Officer

We do but I don’t know if we have it, to be honest, right now.

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

Okay. No worries. Tax rate, how should we be thinking about that? That’s jumped around a little bit. How should we be thinking about that for next year?

Dean Y. Shigemura — Vice Chair and Chief Financial Officer

I think 23% is still a good number. It did pick up a little bit this quarter or second quarter due to some discrete items. But right now we’re looking at for the full-year ’23 this year and then probably into next year.

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

Okay. Okay. Great. And then just more macro. This is really for all three of you. If you could give us a refresh on where we are — the signals are starting to flash, just where we are on two categories; office and leveraged lending? And any details you could provide us just refreshing us on those books? How much is Hawaii versus Mainland? Anything that you can share as far as office LTVs?

Peter S. Ho — Chairman, President and Chief Executive Officer

Yeah. I’ll just say office and leveraged are very small portfolios for us. And Mary, could you give details on that?

Mary E. Sellers — Vice Chair and Chief Risk Officer

Sure. In terms of leveraged, as we disclosed, it’s 2.4% total C&I at the end of the second quarter. It includes seven borrowers with average exposure for about $4.6 million. We don’t have any criticized exposure in that portfolio. Mainland represents about 20% — 7% of total leverage, or 7 basis points of C&I. The mainland exposure is a global base location [Phonetic] ownership and timeshare company with a significant presence here. We enjoy an eight figure deposit relationship, and their leverage is roughly around four times at this. Hawaii is the balance.

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

I’m sorry, you said 27% was Mainland.

Mary E. Sellers — Vice Chair and Chief Risk Officer

Yes.

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

Okay. Thanks. Just clarifying. Okay. Go ahead.

Mary E. Sellers — Vice Chair and Chief Risk Officer

Okay. Hawaii is the balance of that, or about 1.35% of total C&I. The largest exposure there accounts for 54% of that, or 1.3% of total C&I. It is a company that operates a sundry and convenience store here, and is owned by a long established family with significant financial capacity and depth, also enjoy a large relationship. And their current leverage is about 1.6 times.

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

And then do you — that’s super helpful.

Mary E. Sellers — Vice Chair and Chief Risk Officer

[Indecipherable] leverages about 1.6 times.

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

And then do you — that’s super helpful. Do you have the office breakdown?

Mary E. Sellers — Vice Chair and Chief Risk Officer

Sure. Sure. It is the smallest segment in our commercial mortgage portfolio. It represents 11% of the total commercial mortgage book. The weighted average LTV on the portfolio is 57%. Average loan is $1.8 million. In terms of geographic dispersion, 15% is Mainland and that’s extended to a couple of key relationship customers who have diversified commercial mortgage book. The weighted average LTV on the portfolio is 57%. Average loan is $1.8 million. In terms of geographic dispersion, 15% is Mainland and that’s extended to a couple of key relationship customers who have diversified portfolios. Their collateral of pools generally tend to be in supply constrained sub-markets and have an LTV of 45%.

The 85% balance on — in Hawaii is predominantly in Hawaii, with — is in Hawaii with 5% in Guam. 59% is on Oahu. 22% of that is Class A office downtown space with a 66% weighted average LTV. There have been changing dynamics in the Class A space. A number of properties have been converted into other use. So, vacancy is really at its slowest rate in the last 10 years. And in terms of other kinds of segmentation there, we’ve got about 20% that is in medical government type tenant.

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

20% — I’m so sorry. So just to clarify, 20% overall in medical government?

Mary E. Sellers — Vice Chair and Chief Risk Officer

Yes.

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

Okay. That’s great. And then when you — go ahead.

Mary E. Sellers — Vice Chair and Chief Risk Officer

Oh, I’m sorry. Go ahead.

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

I was just going to say when you said, some of it is getting repurposed, converted into other use, do you mean some of the office space is getting converted into condos? Is that what you meant or what you mean by that?

Mary E. Sellers — Vice Chair and Chief Risk Officer

That’s been happening in the downtown area, which has created more limited supply and helped to stabilize vacancy hindrance.

Laurie Havener Hunsicker — Compass Point Research & Trading — Analyst

Got it. Perfect. Okay. Great. Thanks for that color. Appreciate it.

Mary E. Sellers — Vice Chair and Chief Risk Officer

Sure.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of D.A. Davidson. Your line is open.

Jeffrey Rulis — D.A. Davidson & Co. — Analyst

Thank you. Good morning.

Peter S. Ho — Chairman, President and Chief Executive Officer

Hey, Jeff.

Jeffrey Rulis — D.A. Davidson & Co. — Analyst

Dean, just to follow up on the margin. I guess the reported, up 13 basis points, what part of that or what portion of that was from interest recoveries?

Dean Y. Shigemura — Vice Chair and Chief Financial Officer

Was about 2 basis points.

Jeffrey Rulis — D.A. Davidson & Co. — Analyst

Okay. And the 2.44% core excludes that, is that right?

Dean Y. Shigemura — Vice Chair and Chief Financial Officer

Yeah. Okay. So it’s the basis points from the interest recovery, one from PPP loans.

Jeffrey Rulis — D.A. Davidson & Co. — Analyst

Yeah. Right. Thank you. Do you have the June monthly margin? What the margin was for the month of June?

Dean Y. Shigemura — Vice Chair and Chief Financial Officer

We do believe — we don’t normally disclose on a monthly basis.

Jeffrey Rulis — D.A. Davidson & Co. — Analyst

Safe to assume the trends was upward throughout the quarter?

Dean Y. Shigemura — Vice Chair and Chief Financial Officer

Yeah, it was, it was.

Jeffrey Rulis — D.A. Davidson & Co. — Analyst

Okay. Got it. Maybe Peter, a question on the international visitors and any thoughts on kind of resumption of activity there? I guess that you can throw out differences in the domestic spend. But locally, what are the kind of the headwinds there and what are the expectations for some? I mean the numbers are great and coming back, but we still haven’t seen the international side as much. So any thoughts on that?

Peter S. Ho — Chairman, President and Chief Executive Officer

Yeah. It’s going to be — it maybe a while, Jeff. So, Canada, Japan, Korea, and kind of a smattering of other countries make up the international segment. That together generates about 35% of arrivals and 35% of spend. And what we have happening right now is that number is less than half of what it is — what it has been traditionally, kind of headlined by the Japanese who were down over 90% and the Koreans were down not quite as bad as that, but pretty bad. Kind of offsetting that, Canadians are kind of effectively a bounce back at this point. So that’s positive. And Australians are kind of newly able to leave their country and we’re seeing good traction there. So, I think that it’s Japan and Korea. It’s kind of anybody’s guess. I think that’s a combination of both, kind of health issues and conditions. And I understand Japan’s kind of, again, starting to have some viral issues, COVID issues, but I also think it’s also just policy, right? And I can only imagine that the domestic Japanese visitor industry quite appreciates having all of their residents in-house, if you will. So I don’t know. I mean, I think, eventually, the business will come back, that’s for sure. We know that. But kind of predicting which quarter might be a little bit more of a fool’s errand than perhaps we thought previously.

When I talk to hotel professionals, a number of them are kind of thinking, kind of beginning, first quarter next year. And I think probably the sentiment had previously been kind of summer to later ’22. So, that’s a bit of a pushout. But I kind of — if we kind of zoom out a bit and take a look at the macro environment, we’ve got so much domestic traffic right now, that it almost is somewhat of a blessing that we don’t have the international market back as strong, as you know, obviously, eventually we won’t because I’m just not sure where we would put all of those people. I mean, we were at 92% in June by arrivals and over 100% by visitor spend. So the way I look at it is the international market is going to get back. I can only imagine that certainly the Japanese visitor is really anxious to get back to Hawaii, which as you know, they’ve got a deep and long standing love affair with. And potentially as we start to see a little softening on the U.S. domestic side, that might be kind of a nice folding [Phonetic] for us as we move forward.

Jeffrey Rulis — D.A. Davidson & Co. — Analyst

Yeah. Make some sense. Thanks, Peter.

Peter S. Ho — Chairman, President and Chief Executive Officer

Yeah. Thank you.

Operator

Thank you. One moment for our next question. We have a follow-up question from the line of Andrew. Your line is open.

Andrew Liesch — Piper Sandler — Analyst

Thanks so much. Yeah, just a question here on capital and the buyback. And I know that the regulatory ratios are where you focus the most on. But was the TCE ratio below 5%? What’s the appetite to continue buying back shares here?

Dean Y. Shigemura — Vice Chair and Chief Financial Officer

Yeah. I mean, the buyback still continues to be an important part of our capital management program. Right now, the — even though we’ve taken another reduction in our capital because of the AOCI component, it still hasn’t affected our capital distribution plans, continue to expect kind of a modest repurchase program going forward similar to the levels that we had in the last several quarters.

Andrew Liesch — Piper Sandler — Analyst

Got you. All right. Yeah. Thank you for taking the follow up.

Peter S. Ho — Chairman, President and Chief Executive Officer

Great. Thanks, Andrew.

Operator

Thank you. One moment please for our next question. We have a follow-up question from the line of Kelly with KBW.

Kelly Motta — Keefe, Bruyette & Woods — Analyst

Hi. Thank you so much for the follow up. Just a really small housekeeping item. With your fee guidance, I caught that it excludes the Visa Class B share adjustment. Last quarter, I think it was $42 million to $43 million. I assume that also was excluding the Visa adjustment, but I just wanted to clarify. Could you model that out?

Dean Y. Shigemura — Vice Chair and Chief Financial Officer

Yeah. Just when you say excluded, the $41 million to $42 million includes the adjustment. So therefore, on a normalized basis, it would be $42 million to $43 million. So roughly the same guidance that we had previous quarters.

Kelly Motta — Keefe, Bruyette & Woods — Analyst

Okay. Got it. Thank you very much.

Operator

Thank you. I’m sure no further questions in the queue. I will now like to turn the call back over to Jennifer for closing remarks.

Jennifer Lam — Executive Vice President, Treasurer and Director of Investor Relations

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

Operator

[Operator Closing Remarks]