Bank of Hawaii Corp (BOH) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Bank of Hawaii Corporation Third Quarter 2020 Earnings Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

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

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

Before we get started, let me remind you that today's conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected.

During the call, we will be referencing a slide presentation as well as the 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.

Great. Thank you, Cindy. Good morning, everyone. Aloha. I thought what we would do today is follow along the path that we've taken over the past couple of earnings calls and give you a little bit more of an expanded commentary before we get into our Q&A.

I will kick off with a descriptor on the economy and our local experience with the corona 19 virus. I'll then turn it over to Mary, who will share with you some credit highlights, and then to Dean for financials. Then as he finishes up, we'll indeed be happy to answer whatever questions you might have.

So let me begin with a description on the economy. I'd say relatively stable outcome of most recent -- certainly the past quarter, but obviously, at a lower level than anyone would like or appreciate.

We did see a clip up in unemployment in -- for the September month. So September clipped up to 15.1% versus that 13% range that you see for the June through August period. A lot of that driven by -- there were a number of WARN act actions taken within the community. And I guess, one thing to note there that even with the increase in unemployment for September, if you take those 3 months for the quarter, they effectively came online with the UHERO forecast. You see in the light blue bar that UHERO, which is the analysis that we base much more credit decisioning off of, is calling for a 13.4% fourth quarter unemployment level. And in conversations with some of the senior staff over there, they feel cautiously optimistic at this point that, that could -- is achievable, assuming that we get a continued slow but, I think, positive reopening of our trans-pac activity.

Okay, Janelle, let's go to the next slide. Here, you see, on the next slide, just an annualized representation of unemployment. The 9.25% UHERO forecast you see, a little bit more constructive -- or a little bit higher for 2021 and then dipping down for 2022 and 2023. This is in line with a lot of discussions that we've been having with our larger commercial customers and certainly our hospitality customers, who really point to '21 as a restarting year for us and, hopefully, getting to a meaningful level of activity kind of into the 2022 year.

Go to the next slide. I'll just touch a little bit on GDP and personal income. You see the differential and forecast between the gold and gray bars versus the blue bars. Unemployment -- or I'm sorry, real GDP forecasted to rebound in a slightly more muted fashion with the most recent forecast. But I think maybe one of the more important slides or more important takeaways on this slide is to recognize that, well, GDP, obviously, has taken a substantial hit here to the island economy for obvious reasons. Personal income is holding in reasonably well. And so the most recent reforecast, as of September actually, has personal income falling pretty materially less than what we had originally forecast.

On the next slide, give you a sense for how the local housing market has held up. The answer is surprisingly well. So not unlike a number of other mainland marketplaces, housing for lots of different reasons is a bright spot in the economy. You see on a year-to-date basis, single-family homes have had a nice steady increase in median sale prices, up 3.3%. Inventory levels, very constrained. As we look at point-to-point September this year versus last year, a little more -- a bit more price action, prices up 13.3% and sales beginning to accelerate. And again, very tight inventory conditions.

Similar story on the condominium side. I think condominiums perhaps are being impacted by less new product coming on to the marketplace. But again, you see a pretty steady year-to-date median sales price increase and inventory conditions that are just awfully constrained as of right now.

On to arrivals. So I think most of you are aware that beginning on the 15th of this month, so we are 10 days into our pretravel program, Hawaii began welcoming visitors as well as returning or intendant residents and the like back to our islands through pretest programs. So basically, to the extent that you receive a recognized PCR test from a number of approved providers, preferred providers, we call them, we're allowing people with a negative result to come to the islands without having to go through the 14-day quarantine.

And what you see here, obviously, is that's had a very positive impact on trans-pac activity. So you see on this chart that the day before the program went into place, we had upwards of 2,000 visitors. On 10/15, the date that the program launched, up to 8,200 to 7,900, 8,300. We see that pent-up demand. A bit of a dip, but I can tell you that through the weekend, we've begun to bow back to those prior levels. So 10/22, you see 6,200 visitors are returning trans-pac. The 23rd was 5,800, and the 24th was 6,300. So a nice, steady increase.

Asking around town on what people's early sentiment is on the results for albeit the 1.5 weeks, most people feel pretty cautiously optimistic. Frankly, these numbers are a little bit higher than what they would have anticipated. And so I think this bodes well. It certainly gives us a pathway to get the U.S. domestic market reopened, which is 2/3 of our arrivals. Still need to work on international, namely Japan, although there's a lot of activity happening at the administration level to help make that a reality.

On to the next page. The infection rate here in the islands has generally been a good story. You see the chart on the left shows you the activity really experienced what I like to call a post July 4th ramp up where we saw real exponential surge, credit to the Mayor of Honolulu because this was mostly concentrated on Oahu who implemented an 8/27 stay-at-home order. So a bit more relaxed than our prior or initial order, but seems to have done the trick. Infection rate is now falling quite dramatically. And if you look to the chart to the right, what you see is Hawaii, in terms of cases per 100,000 on a rolling 7, or over the past 7 days, is amongst the lowest in the country, so -- of the best-performing states handling the virus in the country.

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

So finally, just to kind of bring it all together, we feel we're extremely well positioned for these most unfortunate times. This is a dynamic environment. This is certainly an uncertain and generational sort of situation. But the company, for the most part, has been built to weather exactly these kinds of occurrences.

So as I mentioned, I think, despite these challenges, we're well positioned. Credit metrics are strong, as Mary will share with you. We had reasonable loan growth in the quarter. Slightly down on a spot basis, slightly up on an average basis, but impacted by about $35 million in line pay downs and installment loan reductions, as you would anticipate. Deposits continue to grow nicely for us, up 3.5% on an average basis. Funding costs continue to come down. And I think as you've come to expect of us, our liquidity and capital levels are certainly top-notch within the industry.

So I think I'll stop there. And I'm happy to kick it over to Mary, who will share some credit thoughts with you. Mary?

Thank you, Peter. At the end of the quarter, the loan portfolio, net of PPP balances, totaled $11.2 billion and remained 60% consumer and 40% commercial, with 76% secured with high-quality real estate with a combined weighted average loan-to-value of 56%. As we've shared before, we believe this portfolio construct, built on consistent conservative underwriting and disciplined portfolio management, will continue to provide us a superior outcome and allow us to continue to support our customers and community through these unprecedented times.

Credit metrics remained strong and relatively stable in the third quarter. We realized net recoveries of $1.5 million for the quarter as compared with net charge-offs of $5.1 million in the second quarter and $3 million in the third quarter of 2019. Nonperforming assets totaled $18.6 million or 16 basis points at period end, down $4.1 million or 3 basis points for the linked period and down $3 million or 4 basis points year-over-year.

Criticized loan exposure increased $51.1 to $250.7 million or 2.13% of total loans. The credit provision was $28.6 million, which, with net recoveries of $1.5 million, resulted in a $30.1 million increase in the allowance for credit losses. The reserve reflects our best estimate of losses in the portfolio given the company's credit risk profile and the current economic outlook and forecast for our market, which, as Peter noted, are anchored off UHERO's September 25 baseline forecast with the reserve build reflective of the continued uncertainty we're facing with COVID-19 and the potential downside associated with this.

At the end of the quarter, the ratio of the allowance for credit losses to total loan and lease outstandings was 1.73%, or 1.80% net of PPP loans, and the reserve for unfunded commitments was $2.3 million, down $200,000 from the second quarter. At the end of the third quarter, customer loan balances on payment deferral or extension totaled $1.5 billion or 13% of total loans.

During the quarter, we continued to receive very few new requests for payment relief. As you may recall, we elected to provide initial payment relief of up to 6 months for our customers, given the degree to which Hawaii was impacted, the provisions afforded under the CARES Act and our capacity to do so. These payment deferrals began to expire in September, with customers returning to their normal payment schedules beginning in October. This cadence will continue through November and December. Accordingly, as of October 23, customer loan balances on payment deferrals have reduced to $1 billion or 8.6% of total loans. This is an $839 million or 45% decline from the second quarter.

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

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

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

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

I'll now turn the call over to Dean.

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

Balance sheet growth is being driven by strong deposits, which increased by $316 million or 1.8% linked quarter and $2.4 billion or 15.6% year-on-year. Over the last 10 years, deposits have grown by an average of 6.2% annually. Concurrent with the strong deposit growth, our total deposit funding costs also continued to decline during the quarter, ending the quarter at approximately 12 basis points. The low cost provides us with flexibility for growth and is a significant contributor to our profitability. As a mitigant against the impact of lower interest rates, we continue to reduce deposit rates as market conditions allow.

At 66%, our loan-to-deposit ratio remains well below peers. With a comparatively low ratio, our solid and growing deposit base provides additional asset funding opportunities and pricing flexibility while reducing our funding risk profile against risk assets. We continue to deploy a portion of that excess liquidity into our investment portfolio and increased balances by $400 million to $6.4 billion. We maintain the high credit quality and liquidity by adding only AAA-rated securities with reliable monthly cash flows. AAA-rated securities represent 96% of the portfolio balances, and 100% remain A-rated or better. The duration of the portfolio was 3.54 years at the end of the quarter and well within our risk tolerances. Thus, the investment portfolio remains a stable and secure source of liquidity and funding for our balance sheet.

Our loan portfolio has shown resilience in the face of a difficult lending environment. The 8.4% growth in balances year-on-year is helping mitigate the impact of sharply lower interest rates and is enabling our stable net interest income. Over the last 10 years, loans have grown by an average of 8.5% annually.

In addition to balance sheet growth, our profitability is further supported by our disciplined expense management. Since 2009, expenses have grown at less than half the rate of inflation, while we are still making critical investments in people, technology and infrastructure projects.

Throughout the pandemic, preprovision net revenue generation remained strong and stable, funding the dividends to shareholders, building additional reserves and adding to our growing capital base. Our strong risk-based capital levels continued to improve in the third quarter, increasing our CET1 and tier 1 capital ratios to 12.1%. We added to our excess capital levels in the third quarter and continue to hold significant amounts of capital in excess of minimum regulatory and well-capitalized levels. These represent funds that can be deployed for further growth or loss mitigation.

Now I'll provide additional details on our financial results. Net income for the third quarter of 2020 were $37.8 million or $0.95 per share. Net interest income on a reported basis in the quarter was $124.2 million, lower by $2.5 million from the previous quarter and lower by $700,000 from the third quarter last year. Included in the second quarter of 2020 net interest income was an interest recovery of $2.9 million. Excluding the interest recovery from the second quarter, net interest income in the third quarter of 2020 increased by $400,000. As Mary discussed, we recorded a credit provision of $28.6 million this quarter.

Noninterest income totaled $41.7 million in the third quarter of 2020, down $9.5 million from the previous quarter and down $4.8 million from the third quarter last year. Noninterest income in the second quarter of 2020 included a gain of $14.2 million from the sale of our remaining Visa shares. Adjusted for the Visa sale, noninterest income increased by $4.6 million or 12.6% linked quarter primarily due to higher deposit and service fees. For the fourth quarter of 2020, we expect noninterest income will be approximately $42 million. While noninterest income has improved, challenges remain due to lower levels of customer activity during the ongoing disruptions from the COVID pandemic.

Noninterest expenses in the third quarter totaled $89.9 million, an increase of $1.1 million from the previous quarter and a decrease of $10.4 million from the second quarter of last year. In the third quarter, occupancy expenses were reduced by $1.9 million from the sale of property, offset by the recognition of $1.8 million of separation expenses.

Accruals for corporate incentives in the third quarter were $2.7 million and continued to be lower than the comparable period in 2019, which was $5.7 million. Included in the expenses for the third quarter of 2019 was an increase of $6 million to legal reserves. For the fourth quarter of 2020, we expect our noninterest expenses will be approximately the same as the third quarter at about $90 million.

The effective tax rate for the third quarter was 20.09%. We estimate the rate will be approximately 20% to 21% for the fourth quarter.

Our return on assets was 0.76%, return on equity was 11.01%, and our efficiency ratio was 54.2%. Our net interest margin in the third quarter was 2.67%, down 16 basis points from the second quarter and down 34 basis points from the third quarter of 2019.

Adjusting for the $2.9 million interest recovery recognized in the second quarter, which benefited the second quarter margin by 7 basis points, the margin in the third quarter was lower by 9 basis points. The increase -- the decrease was primarily due to lower interest rates and much higher levels of liquidity due to strong deposit growth. We expect that our net interest margin will remain under pressure and declined by approximately 7 to 8 basis points in the fourth quarter from the continued impact of lower rates and additional liquidity. However, net interest income is expected to be approximately unchanged from the third quarter as loan growth and asset mix change are expected to mitigate the impact of the lower margin. Our estimates conservatively assume PPP loans are carried for the full 24 months.

Shareholders' equity was $1.36 billion at the end of the third quarter. During the third quarter, we paid out $26.9 million or 71% of net income in dividends. Our share repurchase program remains suspended. And finally, our Board declared a dividend of $0.67 per share for the fourth quarter of 2020.

Now I'll turn it back over to Peter.

Great. Thank you, Dean. So there's our prepared comments. We're happy to share with you whatever questions you might have at this time.

(Operator Instructions) Your first question comes from the line of Ebrahim Poonawala of Bank of America Securities.

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

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

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

On the commercial front, we're down to $480 million, which is down 55%. The secured piece was down 56% from the peak and the unsecured, 52%. Our outlook there is that we'll continue to see some payoffs through the end of the year, probably dropping maybe another $100 million. But we are continuing to support our customers and offering additional deferrals, primarily principal deferrals. And this just really is to partner with them as they've had to draw on their own liquidity and capital to carry the negative, and have done so, and we feel it's appropriate that we assist. And given the low leverage on these assets, it makes sense.

Yes. That's a really good point, Mary. I mean I think, just to add a little color to Mary's commentary, Ebrahim, we're down from $2 billion at mid-year to $1.5 billion quarter end, and as Mary pointed out, $992 million, actually, as of a few days ago. Our expectation is that number will continue to drop. But underlying all of that are clients that we have and have had for a long time who just experienced an extraordinary situation. And so our goal is to be able to support them, obviously, within the bounds of our capital and reserving capability, which we feel very good about.

So I have -- my own sense is that this is actually going quite well. We, as you know, have been building reserves towards this. We can see somewhat the light at the end of the tunnel around that. And on the client side, for their part, they've been dutifully bringing that number down. But we are going to get to a point where that represents the truly deferred population set, and our goal would be to be able to support them by virtue of the fact that we've built the capital around them to do that.

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

Got it. So I guess, fair to assume that as you work with your borrowers, some of them may need deferrals that extend beyond year-end. Is that the right way to think about it?

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

Understood. And thanks for Slide 6 showing the daily arrivals. When you think about the actual, if -- you gave some overview of the local economy, Peter. But as we think about just the reopening of tourism, the hotels, like, do you expect, like, a few weeks from now, all the properties to be opened? Kind of what's going on in terms of your customers and your lodging and restaurant customers at least opening back up over the next few weeks?

Yes. Good question. So we and I have been in pretty consistent conversation with that sector, that industry sector. And a lot -- similar commentary. I think people are -- obviously, because of the fits and starts with the reopening over the summer where people are falling out as they took a bit of a wait-and-see attitude. So we are reopened. Most folks that I talked to are looking to be open kind of early into next month, if you will, so I think that bodes well for arrivals for us.

We're running right now at about 20% of what we used to run in a normal environment. And most of the hoteliers that I speak to are pointing to, gee, if we could get that number more to 50%-ish, that begins to allow them to operate with some semblance of in the black, if you will. So that would be the near term goal. And I think most of them would say, it's going to take maybe another year on top of that to get back to the good old days.

Understood. And if I can sneak in one last one for Dean. Thanks for spelling out the fourth quarter guidance. Just as we think about the securities book, Dean, just talk to us about the pressure on that front. The average yield was about $1.95% in the book in the third quarter. What are new securities coming in at? And what's the outlook for cash flows coming up for maturity over the next, I guess, 1 year?

Yes. So the new yields coming on are about, call it, 1% to maybe 1.25%, so quite low versus what's running off. And the differential in the last quarter was about 1.5%. So we would expect that to continue through the foreseeable future in terms of the low rates.

In terms of liquidity, the portfolio does have a pretty high runoff increase this quarter. I think you saw in the presentation, last quarter was $9.1 million versus the -- and that's in terms of premium amortization, versus the 7.5%. So I would expect the cash flows coming off in the fourth quarter and maybe into next year to be a little bit elevated. But that gives us a lot of liquidity, continued liquidity, and we'll probably be reinvesting a good portion of that back into the portfolio.

Our next question comes from the line of Jeff Rulis of D.A. Davidson.

A question on the migration trends to the island, just in and out of the state. And I guess, is that -- well, that's part one. And then two, as it relates to kind of your mortgage outlook for '21.

So expand for me the migration question, Jeff?

Yes, just more recent flows of folks moving to the state permanently or -- and/or just how that -- yes.

Yes. Yes. So that has been, for 3 years now, somewhat of an issue. So net domestic migration has always been slightly negative at, call it, a couple of thousand per year. So that's the number of folks leaving the islands to the U.S. Mainland and number of people from the U.S. Mainland coming to the islands to live. The last 3 years, we've seen that expand to 10,000, 12,000, 13,000, 14,000, 15,000 people.

The sense we had around that was, prior to COVID, that, that really reflected the high housing costs out here. And so that's a condition that existed pre-COVID. Coming out of COVID, we'll have to see what happens. I think, obviously, economic conditions will be somewhat different. But at the same time, housing prices might be different as well, though that's not bearing out in the statistics right now.

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

Got it. And it's kind of really narrow, but to narrow that into the mortgage outlook for '21, somewhat related, but those are big picture. Just trying to get a sense for the mortgage.

Yes. Mortgage is going to be -- I think mortgage is going to be largely a refi phenomenon. As you know, the VA side is absolutely white hot. So like the Freedom Mortgages of the world are running rough shot. The purchase side is -- it's punching as well. But Hawaii is just an inventory-constrained marketplace. I think if we were a different market, we'd be selling every home nailed down to the ground that we had, but there's just not a lot of homes to buy.

So I think that we believe our forecast is that mortgage will continue to be strong, but mostly in the refi space. And most of that's just because we just don't have that much inventory out here.

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

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

Now what that's helped to do is move things like deposits -- consumer deposits into other channels, albeit electronic channels. So for instance, in August 2019, 61% of our deposits were coming through our branches. Fast forward to this past August, that number is down to 47%.

So we think that, that is a trend that is going to continue. The question is once we come out of COVID or out of this crisis, what will the bounce back factor be? So I guess, the way that we're thinking about it is we -- as you know, we were already down the path of trying to create a more efficient physical presence. I think this has accelerated that to a certain degree. But what we're trying to figure out at this point is if branch volumes are down 50%, what's the bounce back factor? But say the bounce back factor is plus 50% from that down 50%, that still gives you kind of a net-net 25% reduction in overall activity and certainly something that we need to be processing around.

Just to finish off the thought, we've -- we're very happy with our investments on the commerce side because, obviously, because of the reduction in branch activity, traditional branch sales are just off meaningfully. But those, for the most part, have been offset by our e-commerce sales down our mortgage and consumer loan and consumer deposit opening activities. So generally, a good story.

Our next question comes from the line of Jackie Bohlen of KBW.

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

Yes. So there are some hopeful thoughts there, and then there are some longer-term strategic plans that we hope just line up nicely for us there, Jackie. And so one of the expense drivers this year has been, frankly, being pretty draconian on the variable comp side. So our hope is that as provisioning moderates and as operating volumes return to somewhat more normal conditions, that number should obviously bow up a bit, right? So that's going to create a delta for us, at least, versus what we're doing this year.

And what we would anticipate doing, what we're thinking through, is what are the base operating opportunities that we have at our disposal? So Jeff touched and asked about the branch side, branch real estate, that clearly is an opportunity for us. As you know, that's not something that's come about just because of COVID, but I think it's being accelerated because of COVID.

And then we also have a number of efficiency initiatives that are being brought about by just better process design and management as well as by some technology and automation capabilities that we're getting underway on.

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

Okay. Great. Taking a look at deposits, just curious, and this ties in with balance sheet size as well, I noticed that the commercial decline was perfectly offset with consumer and public and just wanted to see what your appetite is for public deposits and if that was just a function of an opportunity you saw or if you're trying to maintain balance sheet growth to offset margin pressure, which you kind of alluded to earlier.

Yes. Well, so let me talk about the numbers first, and then I'll come back to the strategy, if that's okay with you. The numbers -- because we have so many kind of stimulus-type dollars, large dollars, balancing around with some of our larger commercial clients, Jackie, kind of the spot point-to-point numbers can be a little misleading. So now more than ever, we're looking at average balances. And if you look at that, for the quarter, we were up 2.3% on an average deposit basis. Consumer was up 3%; commercial was up 6.4%; and actually, government was down 7.5%. So that gives you the snapshot for the quarter itself.

In terms of our strategy around the government deposit sector and, I guess, more specifically the time sector, pricing has gotten -- has again gotten awfully attractive there. And as we've described in the past, when rates are very low, the municipalities tend to go with the local players just because it's an easier form of execution. I think they prefer to do that. And we can get pricing in the single-digit range, which I think by anybody's book is pretty attractive. As rates rise, things become more competitive and more national in competition, and then that becomes less attractive to us.

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

Our next question comes from the line of Andrew Liesch of Piper Sandler.

I apologize. Just wanted to follow up. Do you hear me?

Yes. Yes.

Okay. Yes, sorry. I just wanted to follow up on the margin and liquidity discussion. And certainly, forecasting out the level of -- the high level of liquidity is going to be challenging. But where -- I mean I recognize margin is going to be down a bit more here this quarter. Where do you guys think that ultimately ends up bottoming out before kind of plateauing -- or, I guess, reaching a trough?

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

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

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

So that's running what? 2.5% right now, right?

Yes.

Yes. So it's still well below regulatory...

Yes. Two points internal, yes.

And still very low overall. I was -- yes, I was wondering what might have been driving that increase.

Very low, yes.

Yes.

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

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

Our next question comes from the line of Laurie Hunsicker of Compass Point.

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

I don't have a breakout per se on me, Laurie.

Okay. I'll circle back. Maybe just generally -- and again, rates are obviously very, very low, but how you're thinking about specifically the public time piece?

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

So I think where we're trading right now is somewhat opportunistic. But just in the broader sense, public space and the time space, in particular, is not really our -- where we would be trying to push the deposit portfolio into.

Okay. Fair. Okay, great. And then, Mary, a question for you. Just hoping we could go back over. Appreciate the October 23 update. So obviously, commercial here drops $837 million, I'm just talking deferrals, $837 million from September 30, down to $480 million at October 23. Do you have a breakdown, either by percentage or dollars, what the retail, lodging and restaurant is for deferrals as of October 23?

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

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

Well, the way to think about it is, if you take the $18 million and you divide it by, say, 8 quarters, that's how much we would amortize into the yield every quarter.

Okay. So just under $16 million then. Okay.

Our next question comes from Casey Haire of Jefferies.

This is Elan Zanger on for Casey. Starting with the resi mortgage yields, they were up a couple of basis points. What drove that? And where are some of the new product coming on at? What pricing?

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

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

Yes.

Well, the loan -- coming off loans that are coming off term because they're being refi, so we have...

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

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

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

It's hard to say right now because of just where we -- the tax rate right now is pretty low at 20%. So I would -- I don't want to give a number because we haven't really kind of delved into the exact impact of what a higher rate would do to us.

As there are no more questions in queue, I'd like to turn the call back over to Cindy Wyrick for closing remarks. Ma'am?

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

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