Bank of Hawaii Corp (BOH) Q1 2020 earnings call dated Apr. 20, 2020
Corporate Participants:
Cindy Wyrick — Director of Investor Relations
Peter S. Ho — Chairman, President and Chief Executive Officer
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
Mary E. Sellers — Vice Chairman and Chief Risk Officer
Analysts:
Ebrahim H. Poonawala — Bank of America Merrill Lynch — Analyst
Casey Haire — Jeffries & Company — Analyst
Jeff Rulis — D. A. Davidson & Company — Analyst
Jacquelynne Bohlen — Keefe, Bruyette & Woods — Analyst
Laurie Havener Hunsicker — Compass Point — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing by. And welcome to the Bank of Hawaii Corporation First Quarter 2020 Earnings Conference Call. At this time, all participant lines 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 speaker today, Cindy Wyrick, Director of Investor Relations. Please go ahead.
Cindy Wyrick — Director of Investor Relations
Thank you, Sara. Good morning, good afternoon everyone. Thank you for joining us today as we discuss the first quarter of 2020. On the call with me today is our Chairman, President and CEO, Peter Ho; our Chief Financial Officer, Dean Shigemura; and our Chief Risk Officer, Mary Sellers.
Before we get started, let me remind you that today’s conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected. During the call this morning, we will be referencing a slide presentation that was included with our press release this morning. A copy of this presentation and the release are available on our website, boh.com, under the Investor Relations link.
And now, I’d like to turn the call over to Peter Ho.
Peter S. Ho — Chairman, President and Chief Executive Officer
Thank you, Cindy. Aloha everyone, mahalo for joining us today. We hope this call finds you, your family and your colleagues in good health and in good stead. Given the depth and breadth of the COVID-19 crisis, we thought we break from the longstanding format of our earnings call. We will still cover Q1’s results, but we’ll bridge that commentary somewhat and place it subsequent to some commentary around the COVID-19 supplement, which you received as part of our press release today. The supplement is intended to share with you how Hawaii has been impacted, how Bank of Hawaii is prepared for the COVID-19 crisis, how we are operating and performing through the crisis and how our liquidity, credit and capital position stack up to the challenge at hand.
I’ll begin by giving a broader overview. Dean will follow to discuss liquidity. Mary will discuss our credit metrics. And Dean will conclude with some thoughts on capital. We will then spend a brief amount of time on Q1, and then we’d be happy to answer whatever questions you might have. So I’m going to begin on the supplemental packet beginning on Page 2 with the overview.
And basically, fundamentally, we view COVID-19 as a multi-faceted crisis. Of course, it’s a health crisis, and it is certainly an economic crisis, but it is also a social crisis and even an ethical crisis. Given this, we believe long-term value will accrue to firms committed to balancing the needs of all stakeholders, customers, employees, shareholders, vendors and the community at large through this crisis. Without question, Hawaii faces substance of short-term and mid-term challenges. However, the long-term attractiveness of Hawaii as a place to live, as a place to visit and as a strategic military vantage point remains unchanged and intact. Our liquidity, credit posture and capital base position us well. Our 123-year history serving our island community has prepared us well to deal with nature setbacks, as we have many times and to support our communities in their time of need.
Now, let me turn to Page 3 of the deck. This will give you a sense for the infection activity here in the Hawaii market and I think the bottom line is we’ve been relatively fortunate compared to some less fortunate parts of the country and the world. As of yesterday, we had six additional cases reported, bringing our total to date to 580 cases reported here in the State of Hawaii. Unfortunately, we’ve had 10 deaths result as a result of COVID-19. If you look at the upper left chart on Page 3, you’ll see that the actions taken by the Governor’s office and the Mayor’s office in third week of March seem to have done the trick in terms of flattening the curve. And you’ll see by looking at the chart on the bottom right that the number of new cases by day seems to be coming down at least for now.
If you go to Slide 4, this gives you a sense for our response time line and for whatever reason, we just identified the situation is something that we really needed to, to wrap our arms, to determine whether there was in fact a clear and present danger represented by this virus at the time coming out of China. By February 3, we convinced ourselves and indeed there was and that set off a pretty large purchase on our part of both PPE and sanitation products. Kind of through this early mid-March period, we were in active discussions with our Board of Directors and our Committee Chairs talking about, scenarios talking about options that we might take in the event that this — at the time coronavirus situation they are to be called the COVID-19 situation accelerated. By March 10, we had a strategic implementation plan in place, and we’re ready to roll that out. By the 3/18 or a week prior to the stay-at-home order by the city, we made the decision to transition Bank of Hawaii in all areas where we could to a work-from-home format and then you see on March 25, two days after the work-from-home order went into place, we took down our branches in a pretty meaningful way.
If you go to Slide 5, just to give you a sense for the primary objectives of our strategic implementation plan for COVID-19, really three-pronged headlines of course by the safety of our employees being absolute paramount to all of our activities. Clearly, we are committed to providing for the essential needs of our customers and our community. And then, thirdly, we recognize as an essential provider that we are providing services to other essential providers as well. And we need to be able to be solutioning a robust plan on their behalf as they continue to do their good work within our community.
On to Slide 6, operationally, we, as I mentioned, brought the branch structure down from 68 branches through our entire Hawaii and West Pacific network down to 31 branches. This is still providing us coverage in all our markets, even in our smallest markets. Here at the headquarters building, we brought our personnel count down from 1,300 people in the headquarters to about 250, so that’s an 80% reduction to that mid-March. We also set up a number of teams and locations sites to perform certain forms of operational functions. The reason to do that obviously to create some redundancy in the event that we had situation subsequent. So to give you an overview of how the workforce is confirmed right now for Bank of Hawaii, approximately 60% of our workforce is working from home, quite effectively I might add. 25% of our workforce is working on site and 15% of our workforce is awaiting activation.
From an employee standpoint on Slide 7, a number of programs implemented as a result of this crisis. Our onsite employees, the 250 employees that I mentioned to you earlier — the 500 employees, I’m sorry that I mentioned to you earlier, each receive a monthly stipend of $500 to help support incidentals; part-time employees earned $250 per month. We have a very tight process around COVID-19 incident management really do that in conjunction with a terrific team of medical, industrial, cleaning professionals that we’ve retained on an advisory basis. Just today, we launched a web-based employee morale and engagement tool to give us a better sense for how our team is doing out there dispersed throughout our marketplaces, and I’m excited to get the feedback on that and see how that might help us improve engagement even further. For our onsite employees, we made sure that we had surplus sick leave available to ensure that people were not being incentive to come to work, if they didn’t feel anything other than 100% ready to go physically and emotionally. And then finally, our executive team is participating in a twice-daily video conference one early in the morning and one later in the afternoon just to ensure that we’re all on the same page as we step through the situation.
Stepping to Slide 8, I’ll talk a little bit about our commitment to our customers. Fundamentally, we are committed to providing full-service banking capabilities via our albeit revised physical layout, our work-from-home workforce and bringing the full force of our digital capabilities forward. We’ve invested a good amount of time and effort and money into our digital offerings over the past several years. And I’m pleased to say that we’re beginning to see the real benefits of that in a situation like this. Payment relief is being provided to both consumer and commercial customers who are asking for it. I’m proud to say we processed over 2,100 PPP loans totaling in excess of $525 million. We had upwards of 10% of our total workforce supporting this effort. Last week on the 15th, we electronically distributed 65,000 stimulus payments totaling $112 million to our customers. As you can imagine, that caused quite a ripple effect through many of our operations. And then finally, we’re committed to exploring emerging loan products like the Federal Reserve’s mainstream loan program as well as potentially our own emerging consumer products.
On Page 9, just to give you a sense for modifications. A total of 5,200 modifications made to date; that’s both commercial as well as consumer totaling 9.8% of our loan outstandings.
On Page 10, just a sense for what we’re doing in the community, I think headlined by Bank of Hawaii Foundation’s $3 million donation to the Hawaii Community Foundation to support Hawaii COVID-19 activities. We also fairly early on donated 1,200 N95 respirators, which we had ordered early on and then, realized those respirators were probably better placed elsewhere. And then in addition, we provided an additional $100,000 in financial support for additional PPE. We waived ATM fees at least through June as we brought down the branch structure and we also provided line staff with broader authority to waive account level fees.
So as for economic impact on Page 11, I think we all would accept that this is an unprecedented situation. And really what is fascinating to me is this is indeed I think historic and that this is the first time, the country has in effect pushed itself into a recession in this case to stave off a novel virus and to try to protect and save as many people as possible, which I think is exactly the right thing to do. That’s come with obviously its economic consequences, but it’s also the first time that our country has implemented massive fiscal and monetary stimulus on the front-end of recession. So it’ll be very interesting to see how this plays out. As for Hawaii, we are in fact impacted, like every other state in the country by the shelter-in-place, work-from-home, stay-at-home policies in place that’s impacting our local economy greatly. A little bit differently from other places is that as a visitor destination, we’re also being impacted by the self-imposed 14-day quarantine rule, which has brought tourism here in the state to virtually a standstill.
So if you turn to Page 12, this is a snapshot of the Hawaiian economy. This is per UHERO 2019 data and you see that the leisure and hospitality industry is a big player in Hawaii. They represent 19% of total jobs in our marketplace. If we go to the GDP proportionality, leisure and hospitality dips a bit to 10%, but still a meaningful element and then down into the personal income line, dips again to a 11%, but still a meaningful component of our marketplace. Fortunately, government and defense spending is equally in some instances, a larger proportion of our economy and for now, those pieces feel pretty stable.
Turning to Page 13, here you see the economic forecast by UHERO that came out at the end of March, the March 31, 2020. And what you see is a call for unemployment spike for the year 2020 of 13.7%. What I think is embedded in there is likely an unemployment rate for this second quarter of in excess of 25% and then furthering down from there over the course of the year.
Turning to Page 14, you will see just other forecast data. On the left side, you see the dark blue real GDP estimates, down 7.7% for the year 2020 forecast and personal income levels down a little bit more muted than minus 2.6%.
On Slide 15, we’ve tabled for you the anticipated federal relief spend to our marketplace, $6 billion, upwards of $60 billion, headlined by the Paycheck Protection Program, which I’m proud to say the Hawaii banks I think did a terrific job in delivering just over $2 billion to our marketplace through this program.
So, I’ll finish off my piece by I think stating the obvious COVID-19, it’s substantial, it’s unprecedented, but we believe Bank of Hawaii is in fact well positioned. We have a seasoned management team. I can tell you the four of us represented in this room have worked together for more than 20 years, and we’re veterans of 9/11; we’re veterans of the financial crisis and now, we’re working through this viral situation; got great liquidity, conservative loan portfolio, strong capital levels and perhaps most importantly, a preeminent market position.
So now, let me turn the call over to Dean to talk about liquidity. Dean?
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
Thanks, Peter. On Slide 17, our liquidity remained strong, supported by a conservative investment portfolio and a solid deposit base. The high-quality composition of our investment portfolio, which represents approximately 30% of total assets, is a source of stored liquidity. Our deposits consisting of an exceptional core deposit base supports a low loan-to-deposit ratio, and we also maintain a deposit cost advantage relative to our national in Hawaii peers.
Slide 18 is a decomposition of our investment portfolio. The conservative construct of our investment portfolio enhances our liquidity. 94% of our investment securities are AAA-rated and 100% are a minimum A-rated. This results in a portfolio that is highly liquid and can easily be utilized to secure additional funding. In addition, the government and agency securities provide secure and reliable monthly repayments for continued balance sheet funding. In 2019, the average monthly cash flow was greater than the $100 million.
Our strong deposit mix is shown on Slide 19. Our deposit base is characterized by solid mix of customers and core deposit accounts that results in low cost and stable funding. Over 90% of balances are from core consumer and commercial customers, and nearly 90% of deposit balances are in core checking and savings accounts.
Our loan-to-deposit ratio shown on Slide 20 is low, especially when compared to peers. Our long history of a relatively low ratio is driven by our strong and stable deposit base. And the low ratio provides added balance sheet flexibility to accommodate ample asset funding opportunities.
Slide 21 shows our deposit growth and deposit cost advantage history. We’ve grown our deposits through a number of different economic environments, while maintaining our low-cost advantage both significantly contributing to our profitability.
Now, I’ll turn it over to Mary.
Mary E. Sellers — Vice Chairman and Chief Risk Officer
Thank you, Dean. Beginning on Slide 2, Bank of Hawaii has three fundamental tenants that guide how we approach lending. We believe that these have proven to provide with — provide us with a superior portfolio construction and performance outcome, allowing us to support our customers and community through difficult economic times. First, we lend to customers we know. Second, we lend to markets we understand. And third, we lend to communities we trust. These underpinnings, coupled with conservative underwriting and disciplined portfolio management, result in a portfolio that’s diversified by category, a portfolio with appropriately-sized exposure, a portfolio that is 73% secured by quality real estate with a combined weighted average loan-to-value of 57% and higher risk categories that are well contained.
Moving to Slide 23. Beginning with our geographic footprint, 92% of our portfolio is Hawaii-based with 6% in the West Pacific and 2% on the Mainland. Our Mainland exposure represents credit extended to our customers who have diversified assets or operations beyond Hawaii.
On the next slide, we highlight how knowing our customers comes from the length of relationships we’ve enjoyed with them. 57% of consumer borrowers and 64% of commercial borrowers have had relationships with the bank for 10 or more years.
On Slide 25, granularity, we take a disciplined approach to managing our exposure limits. And this results in a granular commercial portfolio. 93% of loans are under $30 million, while 72% of loans are under $15 million.
Stepping to Slide 26, our loan portfolio totals $11.4 billion and reflective of our island economies is 60% consumer and 40% commercial with 75% secured with quality real estate. Moving to Slide 27, we’ll detail the consumer portfolio. The consumer portfolio totaled $6.8 billion with 83% secured by low margin real estate. The largest segment, residential mortgage has 0.2% of outstandings with a monitoring FICO less than 700 and a loan-to-value of greater than 80%. In the home equity portfolio, 3.3% of outstandings have a monitoring FICO less than 700 and a loan-to-value of greater than 80%. Our indirect portfolio, which is 10% of the consumer book, has 4.2% of outstandings with a FICO less than 700 and DTI greater than 45%. And the balance of the consumer portfolio is primarily comprised of the direct installment loans with 1.1% having a monitoring score less than 700 and currently 30 days or more past due.
Moving to Slide 28 and our commercial portfolio. 58% of the portfolio is comprised predominantly of Hawaii real estate with strong sponsorship in equity. 90% of the portfolio has a loan-to-value of less than or equal to 75%. Criticized exposure is 4%. The C&I segment is seasoned Hawaii centric and non-levered. 1.3% of outstandings are levered in criticized. The construction segment totaled 5%, has a 61% weighted LTV and is concentrated in low-income for workforce housing. And our leasing portfolio is 2% with granular Hawaii leases accounting for 61%. 37% is legacy national large ticket leases, all for investment-grade rail companies.
Turning now to Slide 29. As Peter commented earlier, the Hawaii and West Pacific markets have been impacted by the COVID-19 event with a number of industries particularly retail, lodging and restaurant and entertainment-related facing the greatest challenge. In our portfolio, exposure to these industries represents 11% of total outstandings.
Moving to Slide 30. Retail exposure is 5% of total loans. 88% is secured by real estate with a 52% weighted average loan-to-value. only 4.2% of the portfolio is either unsecured or not an essential business.
Turning to Slide 31. Lodging represents 5% of total loans. 71% is real estate secured. 84% has a loan-to-value of less than or equal to 65%. And 95% of unsecured outstandings are to global hotel and timeshare brands that maintains significant deposit and ancillary business with us.
And then finally on Slide 32, finishing with the restaurant and entertainment segment. This represents 1% of total loans. 39% is secured with real estate with the weighted average loan-to-value of 63%. Criticized exposure is 6%, 52% of which is secured with real estate.
I’ll now turn the call to Dean.
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
Thanks, Mary. Turning to Slide 33. We maintained strong capital levels that are substantially above the well-capitalized minimums. Our capital structure is simple, all common equity with no preferred securities or other forms of hybrid capital. In addition, we have a long demonstrated and strong history of dividend.
As shown on Slide 34, we maintained our capital levels well in excess of minimums required. Our common equity Tier 1 capital ratio is nearly twice the well-capitalized minimum. Our strong capital position is further supported by our comparatively low level of risk assets.
Slide 35, we have a long and unbroken history of dividends. Bank of Hawaii was one of the few banks that maintained and paid its dividend throughout the financial crisis. And our Board declared a dividend of $0.67 per share for the second quarter of 2020.
Now, I’ll turn it back over to Peter.
Peter S. Ho — Chairman, President and Chief Executive Officer
Okay. So that concludes the COVID-19 supplement. We’re happy to answer your questions. But before we do that, we thought we give you just some group’s thoughts on how Q1 went, which actually prior to the viral situation were trending towards good outcomes. Dean, do you want to touch on that?
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
Sure. Net income for the first quarter was $34.7 million or $0.87 per share. Our return on assets was 0.77%. The return on equity was 10.64%. And our efficiency ratio was 55.96%. Our net interest margin in the first quarter was 2.96%, up 1 basis point from the fourth quarter and down 16 basis points from the first quarter of 2019. Net interest income on a reported basis in the quarter was $126 million, up $2.1 million from the previous quarter and up $1.1 million from the first quarter last year. For the second quarter of 2020, we expect our net interest margin will be about 1 basis point to 2 basis points lower than the first quarter. As Mary will discuss later, we recorded a credit provision of $33.6 million this quarter.
Non-interest income totaled $46.1 million in the first quarter of 2020, down $1.6 million from the previous quarter and up $2.4 million from the first quarter last year. Non-interest income in the previous quarter included a gain of $3.8 million related to an early buyout of a leveraged lease. And non-interest income in the first quarter last year included a $1.4 million commission related to insurance products. Adjusted for these items, the increase compared with the fourth quarter and first quarter of last year were largely due to significant growth in customer derivative activity. Strong mortgage banking revenue during the fourth — during the first quarter was partially offset by an impairment of the mortgage servicing portfolio.
For the second quarter of 2020, we expect non-interest revenue to decline, due to lower levels of customer derivative activity and certain fee waivers that we are offering through June in order to assist our customers during the COVID-19 pandemic.
Non-interest expenses in the first quarter totaled $96.3 million, an increase of $3.2 million from the previous quarter and from the same quarter last year. Non-interest expense for the first quarter of 2020 included seasonal payroll expenses of approximately $3.1 million and severance expenses of $4.7 million that were partially offset by elimination of corporate incentive accruals. There were no significant items during the fourth quarter of 2019. The first quarter of 2019 included seasonal payroll expenses of approximately $2.7 million. For the second quarter of 2020, we expect our total non-interest expenses will be lower by approximately 10% from the first quarter.
Our investment portfolio increased to $5.7 billion. The duration of the portfolio was 2.8 years at the end of March. And premium amortization during the quarter was $6.2 million. During the first quarter, we repurchased 156,400 shares of common stock for a total of $14 million. Due to the uncertainty related to COVID-19 — the COVID-19 pandemic, we suspended the share repurchase program in mid-March. Our shareholders’ equity was $1.33 billion at the end of the first quarter. Our Tier 1 capital ratio was 11.85%, and our Tier 1 leverage ratio was 7.14%.
Now, I’ll turn the call over to Mary.
Mary E. Sellers — Vice Chairman and Chief Risk Officer
Thank you, Dean. Based upon the CECL standard, the allowance for credit loss was $138.2 million as of the end of the first quarter, a $29.8 million increase from our January 1, 2020 implementation date and $28.2 million increase from December 31, 2019. Given net charge-offs of $3.7 million, a provision of $33.6 million was recorded. The increase in the allowance is reflective of management’s best estimate of incurred losses over the life of our portfolio, loans in our portfolio given the Company’s credit risk profile, the economic outlook and forecast for our market with the changing global pandemic as well as the unprecedented front-end intervention with fiscal, monetary and regulatory program.
The first quarter’s estimate was anchored on UHERO’s March 31, 2020 forecast, which estimated Hawaii will realize 13.7% unemployment for the full-year 2020 with job loss peaking at the end of the second quarter, followed by a very gradual reopening of the economy through the latter part of the year. The bank CECL methodology reflects updated portfolio segmentation and use of the Company’s net charge-off experience through the Great Recession. The ratio of the allowance for credit losses to total loans and leases was 1.22% at March 31 compared with 0.99% at January 1, 2020 and 1% at December 31, 2019. The reserve for unfunded commitments was $3.3 million for the first quarter compared with $3.5 million at January 1 and $6.8 million at December 31, 2019.
Peter S. Ho — Chairman, President and Chief Executive Officer
Thanks, Mary. So I know we took a fair amount of time this morning, but we thought it was important to not only update you on the quarter’s results, but also just what’s been happening out here and with Bank of Hawaii in the COVID-19 crisis. So thank you for your interest in Bank of Hawaii. We’d be happy to answer your questions at this time.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Ebrahim Poonawala with Bank of America. Your line is now open.
Ebrahim H. Poonawala — Bank of America Merrill Lynch — Analyst
Thank you. Good morning, Peter.
Peter S. Ho — Chairman, President and Chief Executive Officer
Good morning.
Ebrahim H. Poonawala — Bank of America Merrill Lynch — Analyst
So I guess — first of all, thank you very much for all the details in the slide disclosures. Very helpful. I guess, just in terms of — not sure if for Mary or yourself, how do we think about the reserve build when you look at reserves going from 1% to 1.22%. If you can talk to us in terms of — I mean, when I look at the forecast that you provided, the macro forecast seemed like a pretty decent bounce back next year is what’s baked in, is that kind of what your underlying expectations around how things play out and we start to get close to normal towards the end of the year, into next year?
So if you can talk through just what the assumptions went through because — and tell me if this is right or wrong, but when I compare reserves today versus what happened in the great financial crisis when the reserve ratio went from like 1.38% to, I think, 2.76%, almost doubled over a period of two years. Like, should we just see a gradual increase in reserves until there’s more clarity to the magnitude that we saw in 1Q?
Mary E. Sellers — Vice Chairman and Chief Risk Officer
Yes, Ebrahim. I think that’s very reasonable to expect. Of course, we would, as noted, expect to reserve build if this continues, and the magnitude of that would really be dependant on what we see into the next quarter.
Ebrahim H. Poonawala — Bank of America Merrill Lynch — Analyst
And so, your forecast today is based on the Slide 14 where things kind of bounce back, if that’s what informed your CECL reserve, is that accurate?
Mary E. Sellers — Vice Chairman and Chief Risk Officer
Yes, that is.
Ebrahim H. Poonawala — Bank of America Merrill Lynch — Analyst
Okay.
Peter S. Ho — Chairman, President and Chief Executive Officer
Yeah, but it’s actually muted a bit.
Mary E. Sellers — Vice Chairman and Chief Risk Officer
We did mute the recovery down a bit from what the — you hear our forecast was going into 2021.
Peter S. Ho — Chairman, President and Chief Executive Officer
So we sensitize the reemergence a bit, but probably directionally correct. That’s right.
Ebrahim H. Poonawala — Bank of America Merrill Lynch — Analyst
Got it. So if that — I guess, the conclusion that Peter and it’s all about credit right now for the bank. So, sorry to kind of go on with it, but is it safe to assume like I was looking at 2009, 2010, the bank lost about 200 basis points [Phonetic] to 230 basis points in terms of charge-offs that today you don’t expect this to be as bad or probably half of as bad as ’08, ’09 was, it’s kind of the working assumption right now at the bank?
Peter S. Ho — Chairman, President and Chief Executive Officer
Yeah for a couple of reasons. So first of all, the portfolio — our portfolios have changed pretty dramatically from ’08, ’09 to 2019, 2020. So you know that we’ve taken, really moved the commercial portfolio more towards a secured nature and then on the consumer front, really pushed the portfolios away from — we’re never subprime, but closer to subprime types of products than previously. So for instance, we used to have a pretty substantial shared national credit portfolio, frankly which contain the bulk of our commercial charge-offs, which weren’t actual charge-offs, but were basically losses incurred through the sale of those pieces of paper. So that is a difference that was there in 2008, 2009. That’s just non-existent in our portfolio today. We used to have much larger book of leverage leases, aircraft leases that are — as you can tell from the lease line are pretty much non-existent. In fact, I think our leverage portfolio is down to investment-grade railcars.
And then on the consumer side, we had a 200 — I want to say $200 million-plus small business score products that performed pretty poorly through the financial crisis. That number is — that basically became a legacy product, and I think we only have like $20 million something left to that portfolio. So that was another big percent — or a big charge-off line item for us. Land loans was another area where I think we had upwards of $50 million to — mostly on the neighbor islands, took fair amount of a haircut there. And then finally on the indirect space, we used to lend a lot deeper into the indirect space than we do today. There were losses there.
So when we segment — re-segment the portfolios for what they are today vis-a-vis what they were and then reapply loss rates, Ebrahim, it’s kind of we get when we get. Another note is that we were very aggressive in ’08 and ’09 in taking things to charge-off and in fact, we actually as you probably saw the numbers — subsequent to the recession, saw a good amount of in particular secured types of assets generate pretty sizable recoveries. So, yeah you’re right, there is a differential, but I think there’s pretty good documentation behind what — why that differential exists today versus the financial crisis.
Ebrahim H. Poonawala — Bank of America Merrill Lynch — Analyst
That’s helpful. And I guess just one bigger picture question, Peter, you isolated portfolios around leisure industry and such, but I guess, the perception and our understanding is that the Hawaiian economy and a lot of peripheral industries be it professional services, etc., live of tourism and visitor spending. Talk to us just in terms of from a business standpoint, I’m sure you sit in many sort of Chamber of Commerce-type committees locally, what’s the view in terms of the island recovering from a tourism perspective over the next six to 12 months?
Peter S. Ho — Chairman, President and Chief Executive Officer
Well, I think that the most pressing issue is to continue on with the health trend that we’re experiencing because nothing could be worse than Hawaii as a marketplace being — I don’t want to name names of being like some other visitor areas that are not having the same quality of outcomes that we’re having. Those situations can create not just short-term recovery issues, but long-term branding issues. So I think it’s really important and the consensus that I’m getting from the business community is making sure that we have a positive health outcome is critical, making sure that we have the resident testing and contact tracing capabilities in our marketplace, so that we can emerge the way that’s going to make our visitors as well as residents, of course, feel safe and confident as business resumes, it’s another important element, and that is something that to some extent, we can control here in our islands. But a lot of that is science and Federal as well and the stores capability as well. So I think that there is a desire to be up and running by the end of the year. My guess is that’s going to be a pretty slow transition likely intended to be.
So I think what will happen is, we’re going to begin to pick up the local economy as our shelter-in-place and work-from-home policies adjust. And I think they’re likely to adjust based on the numbers we have. That should create some economic lift for us. But you’re right, the visitor industry is 10% of GDP and indirectly a larger percentage, as you point out, and that will get back to normal, but I think the caution there is, it should only go back to normal when it’s appropriate to do so.
Ebrahim H. Poonawala — Bank of America Merrill Lynch — Analyst
Understood. Thanks for taking my questions. Be safe.
Peter S. Ho — Chairman, President and Chief Executive Officer
Yeah.
Operator
Thank you. Our next question comes from the line of Casey Haire with Jefferies. Your line is now open.
Casey Haire — Jeffries & Company — Analyst
Yeah. Hey, good morning guys. How are you? Quick question on the guidance for 2Q, specifically, can you speak to what’s getting NIM down only 1 basis point or 2 basis points? Is it — do you have more room on deposit costs or securities yield is holding up, just some color there, yeah, just for now?
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
Yeah, you’ve kind of nailed two of the factors. One is that we are able to lower our deposit costs. The other is, the portfolio yield is hanging in there despite the lower rates. And then, the other thing is the — a little bit of a mix shift, more loans versus relative to investment, so kind of those three things are kind of helping us support the NIM at this point.
Casey Haire — Jeffries & Company — Analyst
Okay. So how could security yields be holding up, just given the shape of the curve? I mean — and then also, I’m assuming if PPP continues to be a loan growth driver, that would be NIM dilutive now?
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
Yeah, and I should clarify. None of the — the NIM guidance does not include the PPP loans that we’re going to be booking in the second quarter. In terms of the investment portfolio, what has happened is mortgage spreads have widened out quite a bit. So it’s kind of held up the yield on the portfolio as well as the prepayments haven’t been as high as we had expected. So those two things are kind of holding up the yield on the investment portfolio.
Casey Haire — Jeffries & Company — Analyst
Okay. I understood. And then on the expense side, expenses down 10%. What’s — what is the key contributor there?
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
A lot of it has to do with discretionary expenses. One obvious one would be like travel, can’t travel. So that’s going to go away, but there is other issue — other categories that are coming down, including…
Peter S. Ho — Chairman, President and Chief Executive Officer
Variable comp.
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
Yeah. Variable comp is a big one that we already took down in the first quarter and then some of the seasonal expenses that we had in the first quarter will of course not repeat itself and then, as well as the separation. But it’s going to be a lot of the discretionary expenses coming down.
Casey Haire — Jeffries & Company — Analyst
Okay, very good. And then just switching back to the credit discussion. So the loan modifications that you guys outlined on slide, was it 9 there? How much of that — can you just give some color as to what exactly you are doing. And then how much of that is, I’m assuming that is largely concentrated in your — sort of your worry spots, lodging, retail, restaurant, entertainment sector of the portfolio?
Mary E. Sellers — Vice Chairman and Chief Risk Officer
So in the commercial portfolio, it’s predominantly within our commercial mortgage business and a lot of that is really we’re just seeing a number of our clients looking for principal relief and that really allows them some flexibility for the uncertainty and also to accommodate some of their customers that — and tenants that may need relief. In the consumer side, residential mortgage and home equity are about 10% of the total, and indirect and the other direct are about 11%.
Casey Haire — Jeffries & Company — Analyst
Okay. And just last one, just on the CECL reserve build scenario, did — like I think someone mentioned that unemployment is predicated and unemployment spiking at 24% or peaking at 24%, 25%. I mean it sounds like we’re there right now. So I’m just curious, is there — did any of the reserve build outlook, was it based on a sort of a down case scenario, given that it feels like we’re — or the base cases where we are right now? My point is, it doesn’t feel like it allows for much incremental downside from here.
Mary E. Sellers — Vice Chairman and Chief Risk Officer
No, we really leveraged off where we were at that point in time. And clearly, we will look forward as we do next quarter to see where we are and the impact of magnitude of what’s happening.
Casey Haire — Jeffries & Company — Analyst
Okay, thank you.
Operator
Thank you. Our next question comes from the line of Jeff Rulis with D. A. Davidson. Your line is now open.
Jeff Rulis — D. A. Davidson & Company — Analyst
Thanks. Good morning. Just to reframe maybe that last question, so kind of getting into the day two adjustment, I guess it’s just — is that a March 31 provision versus April 20. And just trying to frame up if you had expectations for a worsening environment, it plays out and we maybe back off from the worst fears. I guess 2Q provisioning, if you could kind of frame up, what that looks like in the event of how that’s lowered or maintained in some fashion?
Mary E. Sellers — Vice Chairman and Chief Risk Officer
I think that’s pretty difficult, really will need to really move into 2Q and see what the magnitude and duration aspect looks at that point.
Peter S. Ho — Chairman, President and Chief Executive Officer
Yeah, I think that one of the challenges, Jeff, is that classically, we’re modeling against trends, right. And right now, we’re modeling against trends as well as outcomes, right. So by outcome, I mean, so it’s hard for us to model with exact certainty when they work from home, stay-at-home policy directive will be lifted. And if it lifted sooner, that has a positive impact on the local economy, if lifted later, it has more of a negative impact. It’s hard to tell now when the core travel quarantine will be lifted. And it it’s lifted earlier, that means the more visitors will come into the market. If it’s later, fewer visitors will come into the market. So, the approach that we’ve taken is on a quarter-by-quarter basis, we’re making our best case assessment based on the information that we have available to us and our best guess for near-term outcomes as best as possible. But it just — it does create a little bit more choppiness I’d say in how we approach provisioning, then perhaps everything is passed, and not because that’s our intent, but I think because of the environment will find ourselves in.
Jeff Rulis — D. A. Davidson & Company — Analyst
All right. Lots of variables, but maybe just two quick ones for Dean. So the premium amortization, you mentioned about, it’s $6 million, a little over $6 million in the first quarter. Again baked in that margin guide is expectations for that to sustain at that level or increase, decrease given the margin guide?
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
The expectation is it will increase some.
Jeff Rulis — D. A. Davidson & Company — Analyst
Okay. And then the follow on, just on the fee income side, that other $10 million for — was pretty high and I think you may be alluded to customer derivative activity, is that what was in there and subsequent I guess you talked about maybe that tails off in the second quarter?
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
Yes. Yeah, it is in that line item.
Jeff Rulis — D. A. Davidson & Company — Analyst
Okay, that’s it from me. Thanks.
Peter S. Ho — Chairman, President and Chief Executive Officer
Thanks, Jeff.
Operator
Thank you. Our next question comes from the line of Jackie Bohlen with KBW. Your line is now open.
Jacquelynne Bohlen — Keefe, Bruyette & Woods — Analyst
Hi, good morning everyone.
Peter S. Ho — Chairman, President and Chief Executive Officer
Jackie.
Jacquelynne Bohlen — Keefe, Bruyette & Woods — Analyst
Looking to the drop that you had in FTE, looking point to point from 1,231 to 330. That roughly, call it, 30 people or so. Is that the extent of what we discussed on last quarter’s call, or is there more to come from that?
Peter S. Ho — Chairman, President and Chief Executive Officer
I’m not sure I understand the question. What are you asking?
Jacquelynne Bohlen — Keefe, Bruyette & Woods — Analyst
Well, you had the severance charges in the quarter and then, you had a decrease in FTE. Before any of the pandemic happened, there was a discussion of some what you were doing to work through expenses for the year. And so, I’m wondering if all of that has been done and that’s reflected into the March 30 — March 31st FTE or if there is more to come from that, and if there’s been any change to how you’re thinking about that in light of the pandemic that’s going on.
Peter S. Ho — Chairman, President and Chief Executive Officer
Yeah. Well, so there’s a lot to impact there to what you’re asking. So first of all, we have not cut back any staff as a result of the pandemic, which is to me that’s an important piece of knowledge to understand. Secondly, the 30 FTE reduction is largely incidental to the severance charge that we took in Q2. The severance charge that we took in Q2 was largely the result of several executive level or senior level positions that we are repositioning that will result in pretty meaningful salary savings for us, but do not really represent a meaningful change in FTE since — it’s kind of the wrong personnel category to compare against.
Jacquelynne Bohlen — Keefe, Bruyette & Woods — Analyst
Okay. So those salary savings, are they reflected in the 10% reduction that you’re anticipating in 2Q or will some of that flow in later in the year or two?
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
There is some in Q2 and then some in Q3 and Q4.
Jacquelynne Bohlen — Keefe, Bruyette & Woods — Analyst
Okay. Would you say the bulk is in Q2 or would you expect the bulk to be in Q3, Q4?
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
I would say it’s evenly spread out.
Jacquelynne Bohlen — Keefe, Bruyette & Woods — Analyst
Okay. Thank you. And then just for clarification purposes, Peter, you mentioned the 15% of your staff is awaiting activation. What does that mean?
Peter S. Ho — Chairman, President and Chief Executive Officer
That means that they — for example, we have certain branch activities that we basically need to have backups in case we have people calling on sick or people that aren’t able to work because none of the schools are in session. That means that we have operational staff and critical areas like vault or items processing where we have the same need for redundancy. So because of lots of just day-to-day things being so different like people frankly lower income, people having to figure out what to do with their kids who are supposed to be in school, and because of the fact that people are getting sick out there unfortunately with this virus, we felt a very strong need to have a good amount of redundancy, so that we can maintain our operation straight through the situation.
Jacquelynne Bohlen — Keefe, Bruyette & Woods — Analyst
Okay. Thank you. That’s helpful. And then just one — last one from me and then I’ll step back. In terms of the PPP loans that you have, the 2,100 that you discussed that have been processed, what amount is approved or are those all approved?
Peter S. Ho — Chairman, President and Chief Executive Officer
They’re all approved. All of those loans have guarantee numbers from the SBA.
Jacquelynne Bohlen — Keefe, Bruyette & Woods — Analyst
Okay. And what general loan size should we think about realizing that a range of loan sizes when trying to calculate the fee that you would expect to receive and amortize over the life of the loan?
Peter S. Ho — Chairman, President and Chief Executive Officer
Oh, I don’t even know what that. I think fee range is 1% to 3%. I think like — I don’t know this, Jackie, but I think if you point at the middle, probably as good against as any.
Jacquelynne Bohlen — Keefe, Bruyette & Woods — Analyst
Okay. Thank you.
Operator
Thank you. Our next question comes from the line of Laurie Hunsicker with Compass Point. Your line is now open.
Laurie Havener Hunsicker — Compass Point — Analyst
Yeah. Hi, thanks good morning.
Peter S. Ho — Chairman, President and Chief Executive Officer
Good morning.
Laurie Havener Hunsicker — Compass Point — Analyst
Dean, my first question is for you. Just wondered how we should be thinking about the tax rate here.
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
The tax rate, we are about 20% to 21% in Q2.
Laurie Havener Hunsicker — Compass Point — Analyst
Okay, great. All right. And then, Mary, I just wondered just a couple of things. First, I just want to make sure oil exposure is zero, was that correct?
Mary E. Sellers — Vice Chairman and Chief Risk Officer
That’s correct.
Laurie Havener Hunsicker — Compass Point — Analyst
Okay. And then multi-family of [Indecipherable]. Go ahead. I’m sorry.
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
I’m sorry, I just wanted to clarify. So we have no classic oil and gas exposure. We do have some retail like service station exposure.
Laurie Havener Hunsicker — Compass Point — Analyst
Yes.
Dean Y. Shigemura — Vice Chairman and Chief Financial Officer
And we do have some natural gas exposure that’s totally different.
Laurie Havener Hunsicker — Compass Point — Analyst
Yeah. Got it. Okay, perfect. Of your CRE book, your $2.6 billion or so, how much of that is multi-family.
Mary E. Sellers — Vice Chairman and Chief Risk Officer
It’s about 47%.
Laurie Havener Hunsicker — Compass Point — Analyst
47% is multi-family. Okay, great and then just I guess last question. Peter, just going back to what Ebrahim was asking regarding the Hawaii economy, I just wondered if you could talk a little bit sort of the tangential effect of tourism. In other words, as we think and I love this breakdown, it’s super helpful, whether you want to talk about GDP by industry or personal income by industry or jobs by industry, just how we think more broadly about the tangential impact of tourism as we’re thinking sort of encompassing everybody from, for example, the cleaners that service the hotels. What would that percentage look like if we took sort of a broader swipe on tourism. Thanks.
Peter S. Ho — Chairman, President and Chief Executive Officer
Yeah. So I think that the numbers somewhat speak for themselves. The biggest impact of this unprecedented pullback in tourism is the effect on jobs because it’s a job heavy industry and we can’t get away from the fact that a big, big percentage of the state’s job ranks come out of this industry. So that has been an absolute problem and it is a crisis for us that we have to deal with. What also is likely true and I don’t know this — I don’t know the specifics around this, but many of these jobs tend to be lower wage jobs as well. And so, there is a bit of a disproportionate outcome when you get to how many jobs have been lost and what’s the reduction in personal income, how that will play through to the economy is somewhat tough to tell, but the way we think about it is the hits to our Community is substantial. And so, we’re very active around trying to support the community. From a contribution standpoint, we will support the community. From a product standpoint, it’s going to help those — that exact ranking for classic classification of people.
I think the other thing you’re getting at is what’s the indirect impact on the visitor industry. 20% of jobs; 10% of personal income; 10% of GDP, yeah, it’s a big number. I mean there is no getting around that. And so, yeah, certainly professional services is going to be impacted. Real estate and trade is going to be impacted because these workers live and sleep some place. So I don’t mean to isolate GDP at 10% and jobs at 19% and personal income at 11%. Those are the direct numbers and there is absolutely an indirect correlation to visitor activity that’s going to have a meaningful negative impact on the state for sure.
Laurie Havener Hunsicker — Compass Point — Analyst
Great, thank you.
Operator
Thank you. This concludes today’s question-and-answer session. I would now like to turn the call back to Cindy Wyrick for closing remarks.
Cindy Wyrick — Director of Investor Relations
I’d like to thank all of you for joining us today and for your continued interest in Bank of Hawaii. As always, please feel free to contact me if you have additional questions or need further clarification on any of the topics discussed today. Thanks everyone. Stay safe.
Operator
[Operator Closing Remarks]