Earnings Call Transcript
BANK OF HAWAII CORP (BOH)
Earnings Call Transcript - BOH Q1 2020
Operator, 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 participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. 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, Sarah. 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'll 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 Ho, Chairman, President and CEO
Thank you, Cindy. Aloha everyone, and thank you for joining us today. We hope you, your family, and your colleagues are all in good health. Given the severity of the COVID-19 crisis, we've decided to adjust the format of our earnings call. We will cover our Q1 results, but we will first address some commentary regarding the COVID-19 situation, which was included in our press release today. This commentary aims to explain the impact of COVID-19 on Hawaii, how Bank of Hawaii is preparing for the crisis, our operational status, and our liquidity, credit, and capital positions. I will start with a broader overview, followed by Dean discussing liquidity, Mary covering credit metrics, and Dean concluding with thoughts on capital. After that, we'll spend a brief time on Q1 results and address any questions you may have. I'll begin with the overview found on Page 2 of our supplemental packet. We see COVID-19 as a multifaceted crisis. It is a health crisis, an economic crisis, a social crisis, and even an ethical crisis. Consequently, we believe long-term value will favor companies that balance the needs of all stakeholders—customers, employees, shareholders, vendors, and the wider community—during this time. Hawaii is facing significant short-term and mid-term challenges, yet its long-term appeal as a place to live, visit, and as a military strategic point remains unchanged. Our liquidity, credit position, and capital have us well prepared. With a history of 123 years serving our island community, we are experienced in overcoming major setbacks and supporting our communities in times of need. Now, let’s look at Page 3 for the current state of infection activity in Hawaii. We have been relatively fortunate compared to other areas in the country and globally. As of yesterday, there were six new reported COVID-19 cases, totaling 580 cases in Hawaii, with 10 unfortunate deaths related to the virus. The measures taken by the Governor and the Mayor in March appear to have helped flatten the curve, as illustrated in the charts on Page 3. Turning to Slide 4, I’d like to provide a timeline of our response. We recognized early on that the situation posed a considerable risk, leading us to acquire personal protective equipment and sanitation products by February 3. Throughout mid-March, we engaged in discussions with our Board and Committee Chairs to explore our options in response to the escalating COVID-19 situation. By March 10, we had a strategic implementation plan ready. Prior to the city’s stay-at-home order on March 18, we transitioned Bank of Hawaii to a work-from-home format where possible, and on March 25, we significantly reduced our branch operations. Slide 5 outlines the main objectives of our strategic plan during this crisis. The safety of our employees is our top priority, followed closely by our commitment to meet the essential needs of our customers and our community. Additionally, we have a responsibility to provide support to other essential providers so that they can continue their vital work in our community. On Slide 6, operationally, we reduced our branch network from 68 across Hawaii and the West Pacific to 31, maintaining coverage even in our smallest markets. Our headquarters staff was reduced from 1,300 to about 250, representing an 80% decrease achieved in mid-March. We established various teams and locations to perform essential functions, ensuring operational continuity. Currently, about 60% of our workforce is effectively working from home, with 25% on-site, and 15% awaiting activation. On Slide 7, you can see the programs we've implemented in response to this crisis. Each of our 500 employees receives a monthly stipend of $500, while part-time employees receive $250. We have a comprehensive COVID-19 incident management process in place, supported by a team of medical cleaning professionals we’ve consulted. Recently, we launched a web-based tool to monitor employee morale and engagement to gather insights on improving our team's experience. For those working on-site, we've ensured surplus sick leave is available so that employees feel comfortable staying home if they aren’t feeling 100% ready. Our executive team holds twice-daily video conferences to ensure alignment as we navigate through this situation. On Slide 8, we discuss our commitment to our customers. We are focused on providing full-service banking via our revised physical layout, our work-from-home capacity, and enhanced digital capabilities. We've invested significantly in our digital services over the years, and we are now seeing the benefits come to fruition. We’re providing payment relief for both consumer and commercial customers as requested. We processed over 2,100 Paycheck Protection Program loans, totaling more than $525 million, supported by over 10% of our total workforce. Last week, we distributed 65,000 stimulus payments electronically, totaling $112 million to our customers, significantly impacting our operations. We are also exploring new loan products from the Federal Reserve’s Main Street loan program, as well as potential new consumer offerings. On Page 9, we report that we've made a total of 5,200 modifications across both commercial and consumer loans, amounting to 9.8% of our loan outstandings. Page 10 highlights our contributions to the community, including a $3 million donation from the Bank of Hawaii Foundation to the Hawaii Community Foundation for COVID-19 relief efforts. We also donated 1,200 N95 respirators and an additional $100,000 for more PPE. We waived ATM fees through June and empowered staff to waive account-level fees as needed. Looking at the economic impact on Page 11, we acknowledge that we are in unprecedented times. We are witnessing a historic recession caused by efforts to combat the virus, which, although necessary, has economic implications. It's noteworthy that this is the first instance where the country has implemented vast fiscal and monetary stimulus in anticipation of a recession. Hawaii's economy is affected like others due to restrictions and quarantine measures, significantly stalling tourism. Page 12 shows the economic landscape based on UHERO 2019 data, illustrating that the leisure and hospitality sector accounts for 19% of jobs in Hawaii. Although it represents a smaller share of GDP at 10% and personal income at 11%, it remains significant. Fortunately, government and defense spending represents a stable segment of our economy for now. On Page 13, the economic forecast from UHERO predicts a spike in unemployment to 13.7% in 2020, with a likely rate exceeding 25% in the second quarter, gradually decreasing thereafter. Page 14 presents further forecast data, showing anticipated declines in real GDP of 7.7% for 2020, alongside a more tempered decrease of 2.6% in personal income. On Slide 15, we estimate Federal relief spending in our market to be around $6 billion, with the Paycheck Protection Program leading to over $2 billion delivered by Bank of Hawaii to the marketplace. I'll conclude by reiterating that COVID-19 is substantial and unprecedented, but Bank of Hawaii is well-positioned to navigate it. Our experienced management team has faced previous crises together, and we're now addressing this challenge. With strong liquidity, a conservative loan portfolio, solid capital levels, and a prominent market presence, we are prepared. Now, I will hand the call over to Dean to discuss liquidity.
Dean Shigemura, CFO
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, support a low loan-to-deposit ratio, and we also maintain a deposit cost advantage relative to our National and 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 minimum investment grade rated. This results in a portfolio that is highly liquid and can easily be utilized to secure additional funding. In addition, the government and agency securities provide secure and reliable monthly payments for continued balance sheet funding. In 2019, the average monthly cash flow was greater than $100 million. Our strong deposit mix is shown on Slide 19. Our deposit base is characterized by a solid mix of customers and core deposit accounts that result 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. 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, which contributes significantly to our profitability. Now I’ll turn it over to Mary.
Mary Sellers, Chief Risk Officer
Thank you, Dean. Beginning on Slide 22. Bank of Hawaii has three fundamental tenants that guide how we approach lending. We believe that these have proven to 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 couple 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, 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, we take a disciplined approach to managing our exposure limits, resulting 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 reflects our island economies, with 60% consumer and 40% commercial, of which 75% is 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 well-margin real estate. The largest segment, residential mortgage, has only 0.2% of outstanding loans with a monitoring FICO score less than 700 and a loan-to-value greater than 80. In the home equity portfolio, 3.3% of outstandings have a monitoring FICO score less than 700 and a loan-to-value 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 a DTI greater than 45%. The balance of the consumer portfolio is primarily comprised of 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 and equity. 90% of the portfolio has a loan-to-value of less than or equal to 75%. Criticized exposure is at 4%. The C&I segment is seasoned Hawaii-centric and non-levered. 1.3% of outstandings are levered and criticized. The construction segment totals 5% as a 61% weighted LTV, and is concentrated in low-income or workforce housing. 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, restaurant, and entertainment related industries facing the greatest challenge. 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 outstanding loans are to global hotel and timeshare brands that maintain significant deposits and ancillary business with us. Finally, on Slide 32, finishing with the restaurant and entertainment segment, this represents 1% of total loans. 39% is secured with real estate, with a weighted average loan-to-value of 63%, criticized exposure is at 6%, where 52% of that is secured with real estate. I'll now turn the call back to Dean.
Dean Shigemura, CFO
Thanks, Mary. Turning to Slide 33. We maintained strong capital levels that are substantially above the well-capitalized minimums. Our capital structure is simple, consisting entirely of common equity with no preferred securities or other forms of hybrid capital. In addition, we have a long demonstrated and strong history of dividends. As shown on Slide 34, we maintain 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 shows 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. Our Board declared a dividend of $0.67 per share for the second quarter of 2020. I'll turn it back over to Peter.
Peter Ho, Chairman, President and CEO
Okay. So that concludes the COVID-19 supplement. We're happy to answer questions, but before we do that, we thought we'd provide just some group's thoughts on how Q1 went, which actually, prior to the viral situation, was trending towards pretty good outcomes. Dean, do you want to touch on that?
Dean Shigemura, CFO
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 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. 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 revenues during the first quarter were 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, 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. In the first quarter, we repurchased 156,400 shares of common stock for a total of $14 million. Due to the uncertainty related to 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%. I'll turn the call over to Mary.
Mary Sellers, 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 a $28.2 million increase from December 31, 2019. Given the charge-offs of $3.7 million, a provision of $33.6 million was recorded. The increase in the allowance reflects management's best estimate of incurred losses over the life of our portfolio, considering the company's credit risk profile, the economic outlook, and forecasts for our market with the changing global pandemic, as well as the unprecedented front-end intervention with fiscal monetary and regulatory programs. The first quarter's estimate was anchored on New UHERO's March 31, 2020 forecast, which estimated Hawaii will realize a 13.7% unemployment rate 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's CECL methodology reflects updated portfolio segmentation and 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 Ho, Chairman, President and CEO
Thanks, Mary. 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.
Operator, Operator
Thank you. Our first question comes from the line of Ebrahim Poonawala with Bank of America. Your line is now open.
Ebrahim Poonawala, Analyst
Thank you. Good morning, Peter.
Peter Ho, Chairman, President and CEO
Good morning.
Ebrahim Poonawala, Analyst
Thank you for the detailed information; the slide disclosure is very helpful. Regarding the reserve build, could you share your thoughts on the increase from 1% to 1.22%? When I review the macro forecast you provided, it suggests a solid rebound is anticipated for next year. Are these your core expectations as we move towards normalization by the end of this year and into next year? Also, when I compare current reserves to the great financial crisis—where the reserve ratio rose significantly over two years—should we expect a steady increase in reserves until we gain more clarity on the situation we encountered in the first quarter?
Mary Sellers, Chief Risk Officer
Yes, Ebrahim. I think that's very reasonable to expect. Of course, we can expect to reserve build if this continues. The magnitude of that would really depend on what we see in the next quarter.
Ebrahim Poonawala, 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 Sellers, Chief Risk Officer
Yes, that is.
Peter Ho, Chairman, President and CEO
Yes, but it's actually muted a bit.
Mary Sellers, Chief Risk Officer
We did mute the recovery down a bit from what the UHERO forecast was going into 2021.
Peter Ho, Chairman, President and CEO
Yes. So we sensitized the reemergence a bit, but it's probably directionally correct. That's right.
Ebrahim Poonawala, Analyst
So, to conclude, it's evident that credit is the main focus for the bank right now. If I look back at 2009 and 2010, the bank experienced about 230 basis points in charge-offs. Would it be fair to say that your expectation today is not as severe, potentially about half as bad as it was during 2008-2009?
Peter Ho, Chairman, President and CEO
Yes, for a couple of reasons. First, our portfolios have changed dramatically from '08-'09 to 2019-2020. You’ll know that we've really moved the commercial portfolio more towards a secured nature. On the consumer front, we have really pushed the portfolios away from what were never sub-prime products but were closer to sub-prime types previously. For instance, we used to have a substantial shared national credit portfolio, which contained 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. That is a difference that was there in 2008-2009, that is nonexistent in our portfolio today. We used to have a much larger book of leveraged leases, aircraft leases that are pretty much nonexistent now; our leveraged portfolio is down to investment-grade railcars. Then on the consumer side, we had a $200 million plus small business score product that performed poorly during the financial crisis, which basically became a legacy product; I think we only have like $20 million left in that portfolio. Land loans was another area, where I think we experienced upwards of $50 million mostly on the Neighbor Islands, taking a fair amount of haircut there. Finally, in the indirect space, we used to lend a lot deeper than we do today which led to losses. So, when we re-segment the portfolios for what they are today versus what they were, and then reapply loss rates, Ebrahim, we get what we get. Another note is that we were very aggressive in '08-'09 in taking things to charge-off, and in fact, we saw a good amount of, in particular secured types of assets generating sizable recoveries subsequent to the recession. So yes, you’re right; there is a differential, but I think there’s pretty good documentation behind why that difference will exist today versus the financial crisis.
Ebrahim Poonawala, Analyst
That’s helpful. And I guess just one bigger picture question Peter. You isolated portfolios around the 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 off of tourism and visitor spending. Talk to or just in terms of from a business standpoint, and I am 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 Ho, Chairman, President and CEO
I believe the most urgent matter is to maintain the positive health trend we are currently experiencing. We certainly do not want Hawaii to become like other tourist destinations that are not achieving the same favorable outcomes we are. Such circumstances could lead to both immediate recovery challenges and long-term branding problems. The feedback I am receiving from the business community indicates that ensuring a positive health result is essential, along with establishing resident testing and contact tracing capabilities. This will help create a sense of safety and confidence for both visitors and residents as business activities resume. While we can control some aspects of this situation in our islands, much relies on scientific data and federal resource support. There is a collective desire to be operational by year-end, though I suspect this will be a gradual process. We are likely to see an uptick in the local economy as our shelter-in-place and remote work policies evolve, which seems probable given the current data. However, as you mentioned, the visitor industry represents 10% of our GDP and an even larger share when considering indirect contributions. It will eventually return to a state of normalcy, but we must ensure that this happens at the appropriate time.
Ebrahim Poonawala, Analyst
Understood. Thanks for taking my questions.
Operator, Operator
Thank you. Our next question comes from the line of Casey Haire with Jefferies. Your line is now open.
Casey Haire, Analyst
Yes, good morning everyone. I have a quick question regarding the guidance for the second quarter, specifically about what's causing the net interest margin to decrease by only 1 to 2 basis points. Do you have more flexibility with deposit costs, or are the yields on securities remaining stable? I'd appreciate any insights you can share.
Dean Shigemura, CFO
Yes, you've kind of nailed two of the factors. One is that we're able to lower our deposit costs. The other is that the portfolio yield is hanging in there, despite the lower rates. There is also a little bit of a mix shift with more loans versus investments. So kind of those three things are helping us support the NIM at this point.
Casey Haire, Analyst
Okay. So how could the 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 Shigemura, CFO
Yes, I should clarify. 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, and prepayments haven't been as high as we expected. So those two elements are holding the yield on the investment portfolio.
Casey Haire, Analyst
Okay, understood. And then on the expense side, you mentioned expenses down 10%, what is the key contributor there?
Dean Shigemura, CFO
A lot of it has to do with discretionary expenses. An obvious one would be travel; we can't travel, so that's going to go away. But there are other categories coming down, including variable compensation.
Peter Ho, Chairman, President and CEO
Yes, variable compensation is a significant item that we already took down in the first quarter. Seasonal expenses from Q1 will not be repeated, along with some of the separations. Most of the discretionary expenses are coming down.
Casey Haire, Analyst
Okay, very good. Now, regarding the credit discussion, can you provide more details about the loan modifications mentioned on slide nine? Specifically, how much of this is happening and is it mainly focused on the sectors you are concerned about, such as lodging, retail, restaurant, and entertainment?
Mary Sellers, Chief Risk Officer
In the commercial portfolio, it's predominantly within our commercial mortgage business. A lot of that is really we're seeing our clients looking for principal relief, which allows them some flexibility for the uncertainty and to accommodate their customers and tenants who 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, Analyst
Okay. And just the last one, on the CECL reserve build scenario. I think someone mentioned that unemployment is predicated on spiking at 24% or peaking at 25%. I mean, it sounds like we're there right now. So I'm just curious if any of the reserve build outlook was based on a sort of down-case scenario? Given that, it feels like the base case is where we are right now. My point is it doesn't feel like it allows for much incremental downside from here.
Mary Sellers, Chief Risk Officer
No. We really leveraged off where we were at that point in time, and clearly we look forward as we move into Q2 to see the impact and magnitude of what's happening.
Casey Haire, Analyst
Okay. Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Jeff Rulis with D.A. Davidson. Your line is now open.
Jeff Rulis, Analyst
Thanks. Good morning. Just to reframe maybe that last question. So, is that a March 31 provision versus April 20? And just try to frame up, if you had expectations for a worsening environment, if it plays out, and we may move back off from the worst fears, I guess Q2 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 Sellers, Chief Risk Officer
I think that's pretty difficult. We'll need to really move into Q2 and see what the magnitude and duration aspects look like at that point.
Peter Ho, Chairman, President and CEO
Yes, I think 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. It's hard for us to model with exact certainty when the work from home, stay-at-home directives will be lifted. If it's 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 travel quarantine will be lifted. If it's lifted earlier, more visitors will come into the market; if it's later, fewer visitors will come into the market. So the approach we've taken is, on a quarter-by-quarter basis, we're making our best case assessment based on the information we have available to us and our best guess for near-term outcomes as best as possible. This creates a little more choppiness in how we approach provisioning than perhaps in the past, not because that's our intent, but because of the environment we find ourselves in.
Jeff Rulis, Analyst
Right. Lots of variables. Maybe just two quick ones for Dean. So the premium amortization you mentioned about $6 million in the first quarter, again, is that baked in that margin guide, and are expectations for that to sustain at that level or to increase or decrease given the margin guide?
Dean Shigemura, CFO
The expectation is it will increase some.
Jeff Rulis, Analyst
Okay. And then the follow-on, just on the fee-income side, that other $10 million was pretty high. I think you maybe 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 Shigemura, CFO
Yes, it is in that line item.
Jeff Rulis, Analyst
Okay. That's it for me. Thanks.
Peter Ho, Chairman, President and CEO
Thanks, Jeff.
Operator, Operator
Thank you. Our next question comes from the line of Jackie Bohlen with KBW. Your line is now open.
Jackie Bohlen, Analyst
Hi. Good morning, everyone.
Peter Ho, Chairman, President and CEO
Hi, Jackie.
Jackie Bohlen, Analyst
Looking to the drop that you had in FTE, looking point-to-point from 12/31 to 3/30, 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 Ho, Chairman, President and CEO
I'm not sure I understand the question. What are you asking?
Jackie Bohlen, 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 what you were doing to work through expenses for the year. I'm wondering if all of that has been done and is reflected in the March 31 FTE, or if there's 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 Ho, Chairman, President and CEO
Yes, there’s a lot to unpack with your question. First, we have not cut back any staff as a result of the pandemic, which is important. Secondly, the 30 FTE reduction is largely incidental to the severance charge that we took in Q2. The severance charges were largely the result of several executive level or senior-level positions that we are repositioning, resulting in meaningful salary savings, but do not represent a significant change in FTE. It's a different category to compare against.
Jackie Bohlen, Analyst
Okay. So, those salary savings are reflected in the 10% reductions that you anticipate in Q2? Or will some of that flow in later in the year or two?
Dean Shigemura, CFO
There is some in Q2 and then some in Q3 and Q4.
Jackie Bohlen, Analyst
Okay. Would you say the bulk is in Q2, or would you expect the bulk to be in Q3, Q4?
Dean Shigemura, CFO
I would say it's evenly spread out.
Jackie Bohlen, Analyst
Okay, thank you. And just for clarification purposes. Peter, you mentioned that 15% of your staff is awaiting activation; what does that mean?
Peter Ho, Chairman, President and CEO
That means that we have certain branch activities that require backups in case employees are sick or unable to work due to various circumstances, such as school closures. We have operational staff in critical areas like the vault or items processing, where backup is necessary. Given the variability of day-to-day operations, many employees are trying to manage situations with children who should be in school, or unfortunately, dealing with illnesses. We strongly believe in the need for redundancy to maintain our operations during this situation.
Jackie Bohlen, 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 processed, the 2,100 that you discussed, are those all approved?
Peter Ho, Chairman, President and CEO
They are all approved. All of those loans have guarantee numbers from the SBA.
Jackie Bohlen, Analyst
Okay. And what general loan size should we think about realizing, that's a range of loan sizes, when trying to calculate the fee you expect to receive and amortize over the life of the loan?
Peter Ho, Chairman, President and CEO
I don’t even know what that number is.
Mary Sellers, Chief Risk Officer
265.
Peter Ho, Chairman, President and CEO
I think the average C range is 1% to 3%. I don’t know the specifics, but I think taking the middle is probably good as any.
Jackie Bohlen, Analyst
Okay. Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Laurie Hunsicker with Compass Point. Your line is now open.
Laurie Hunsicker, Analyst
Hi, thanks. Good morning. Dean, my first question is for you; just wondered how we should be thinking about the tax rate here?
Dean Shigemura, CFO
The tax rate is around 20% to 21% in Q2.
Laurie Hunsicker, Analyst
Okay, great. And then Mary, I just wondered, just a couple of things. First, I just want to make sure, oil exposure is zero. Is that correct?
Mary Sellers, Chief Risk Officer
That is correct.
Laurie Hunsicker, Analyst
Okay. And then multifamily…
Mary Sellers, Chief Risk Officer
Your line is now open. Hi, thanks. Good morning. Dean, my first question is for you; just wondered how we should be thinking about the tax rate here? The tax rate is around 20% to 21% in Q2. Okay, great. And then Mary, I just wondered, just a couple of things. First, I just want to make sure, oil exposure is zero. Is that correct? That is correct. Okay. And then multifamily…
Laurie Hunsicker, Analyst
Go ahead, I am sorry.
Peter Ho, Chairman, President and CEO
I am sorry, I just wanted to clarify. We have no classic oil and gas exposure. We do have some retail service station exposure, and we have some natural gas exposure, which is a bit different.
Laurie Hunsicker, Analyst
Got it. Okay, perfect. Of your CRE book, your $2.6 billion or so, how much of that is multifamily?
Mary Sellers, Chief Risk Officer
It's about 47%.
Laurie Hunsicker, Analyst
47% is multifamily. Okay, great. And then just, I guess last question. Peter, just going back to what Ebrahim was asking regarding the Hawaii economy, I wondered if you could talk a little about the tangential impact of tourism. In other words, as we think about GDP by industry or personal income by industry or jobs by industry. How we think about the tangential impact of tourism, encompassing everybody from the cleaners that service the hotels? What would the percentage look like if we took a broader swipe on tourism? Thanks.
Peter Ho, Chairman, President and CEO
Yes, 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. A big percentage of the state’s job ranks come from this industry. This has been an absolute problem and it is a crisis we have to deal with. What is likely true, and I don't know the specifics, is that many of these jobs tend to be lower wage jobs, resulting in a disproportionate outcome with how many jobs have been lost, and what the reduction of personal income will be. The way we think about it is the hits to our community, capital 'C', is substantial. Therefore, we're very active in trying to support the community from a contribution standpoint. We will support the community with products that assist these ranks of people. As you pointed out, the visitor industry contributes 20% of jobs, 10% of personal income, and 10% of GDP. Yes, it's a big number and that indirect correlation has a meaningful negative impact on the state for sure.
Laurie Hunsicker, Analyst
Great, thank you.
Operator, 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
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.