Q4 2020 Bank of Hawaii Corp Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the Bank of Hawaii Corporation fourth quarter 2000 of 'twenty earnings call.
At this time, all participants on a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press Star then one when your telephone please.
Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star then zero.
I would now like to hand, the conference over to your speaker for today, Cindy Wyrick you may begin.
Thank you good morning, good afternoon, everyone. Thank you for joining us today as we discuss the financial results for the fourth quarter of 'twenty 'twenty on the call with me today is our chairman President and CEO, Peter Ho our chief.
Chief Financial Officer, Dean Chicken, Laura our Chief Risk Officer, Mary Sellers, and Chanel, He kind of our new manager of Investor Relations.
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 will be referencing of slide presentation as well as of the earnings release, a copy of this presentation and the release are also available on our website <unk> Dot com under Investor Relations and now let me turn the call over to Peter Ho.
Thank you Cyndi and good morning, everyone or good afternoon.
I'm going to.
Touch a little bit on the Hawaii market.
And now I'll turn it over to Dean into Marin to talk on finances, as well as our improving risk profile.
And then I'll finish with some thoughts on how we're thinking about 2021 before we take your questions.
Begin with so I'd see quarter four represented a good quarter, just a little bit noisy, but generally we saw a stabilizing economy.
Good revenue on balance sheet growth.
Expense management, when you cut through a bunch of noise in there.
Fortress capital and a terrific liquidity position and.
An improving loan deferral population that Mary will touch on.
And then finally I think as we step into 2021.
Roughly well prepared to take on the challenges of this year.
Let me touch on the economy for a for a bit on a few slides here what you see here is why unemployment.
Really the most of those twin towers in April and May of 23, 6% on 23, 4% representing effectively our high watermark as we stepped into the pandemic and then winnowing down.
Slowly down.
Down slowly I guess is the catch phrase, but still stubbornly high relative to pre pandemic levels Q4 forecast is coming in at about $13 five of which represents a bit of an of an improvement from the prior quarter and then the forecast moving forward into Q1 is for a little bit of erosion on that number.
<unk> as we get through the Holiday Act.
Activity as well as of I think contribute to some of the infection rates that we're seeing on the mainland in particular, our west coast markets, which have a bigger impact on us than some other markets.
This is the longer term.
Outlook for inflation or I'm, sorry of unemployment on page five here you see the forecast as of 12 of 11 has been bumped up modestly and again not really of speaking to.
Two things one.
On a.
Infection rate I think probably above what we had anticipated and in an infection rate occurring as I've mentioned in some of our more strategic locations on the U S mainland.
Not as.
Embedded in this in this forecast after talking with you here of folks is to the amount of stimulus that is now looking.
What I would call possible.
And so this this forecast was really built around a level of stimulus, but probably more on the moderate size from where I think most of these mines eyes are right now.
We've learned to GDP and personal income.
Do you see in 2020.
On the dark blue.
The.
Our forecast of down 10%, it's actually a slight improvement from.
From the prior of prior year's forecast really more for adjustment basis.
As we look into 2021 basically what you hear was forecasting is basically a flat line of cross where we ended up in 2021, and then a bounce back in 2022 on the brighter side first of all income levels.
Actually.
Somewhat ironically, but not.
Not surprisingly versus what's happening across the entire country grew in 2020 as a result of the extraordinary stimulus provided on the physical side into into our system, certainly Hawaii as beneficiary of about $10 billion.
Enjoyed that surplus as well.
On a bit of a dip in 'twenty and 'twenty one as forecast again I mentioned that this forecast was done with probably a little bit more of a a little more sober view around the possibilities for stimulus from 'twenty to 'twenty one.
So maybe there is some room for upside there, but basically the call is for personal income levels to get back to 2019 levels.
Talk a little bit about the real estate market here on Oahu, which is as I think most of you know our primary market.
Median sales for the year were up five 2% for single family homes to 4% for condominiums.
December on December numbers are even stronger at six 1% and six 9%, respectively and inventory conditions continued to be very tight so days on market for single family is 14 days on market for condominiums 24 days still very much a.
Sellers market, if you will.
I'll finish on the infection or I'm, sorry, let me turn to daily arrivals before I guess the infection.
As I think most of you know we launch of our safe travels program that that has been after a few.
<unk> fits and starts and staff foods I think.
Pretty well received program, where we're actually getting to what I'd call more of a normal state of operation there and what you see it's having some positive impact on our arrivals, but certainly nothing or anywhere near where we were previously so running at this point 20 of the 30% of prior year.
And likely to wind out at that level.
Short of the pandemic.
Cooling itself of subsiding in our key markets and probably really looking more towards the back end of this year and allowing for hopefully, allowing for the vaccine to do its job.
On the next slide over to infection rates.
Still a very very good story for Hawaii.
You know the isolation that I mentioned has created challenges for us.
From a travel in the visitor industry standpoint works the other way for us on the infection sides of Hawaii really much through the entire entirety of the pandemic has been.
One of the safer places in the country I would say.
By infection average per day per hundred thousands of people.
So that's a little snapshot on the local marketplace now let me turn it over to Dean who will give you some of the financial highlights Deane. Thank.
Thank you Peter.
Net income for the full year of 2020 was $153 million of $3 86 per share.
Net income for the fourth quarter was $42 3 million of $1 <unk> per share.
Net interest income for 2020 on a reported basis was $496 $3 million on $1 4 million from 2019.
Net interest income in the fourth quarter was $119 5 million.
<unk> in the fourth quarter net interest income was a one time reduction of $3 million for an impairment of the average lease.
Excluding the impairment on the fourth quarter net interest income was $122 5 million.
A decrease of $1 7 million from the previous quarter of one 4 million from the same quarter of 2019.
We recorded a credit provision of $15 $2 million this quarter, which includes $2 $7 million to establish a reserve for interest associated with deferrals.
Noninterest income for the full year of 2020 was $184 4 million an increase of $1 1 million from 2019.
Noninterest income totaled $45 3 million in the.
Fourth quarter.
The increase in the fourth quarter.
From from the prior quarter was driven by strong mortgage banking income.
Customer derivative revenue.
Noninterest income in the fourth quarter of 2019 included a gain of $3 8 million related to the early buyout of the average lease.
For this onetime item noninterest income in the fourth quarter of 2020 increased $1 4 million from the fourth quarter of 2019, despite the ongoing challenges of the pandemic.
We expect noninterest income in 2021 to be approximately $42 million to $43 million per quarter on.
Noninterest income has greatly improved from earlier in the pandemic economic conditions remain challenging.
In addition, higher interest rates may reduce mortgage banking volume and revenue.
Noninterest expense for the full year of 2010.
Was $373 $8 million, a decrease of one 4% compared with $379 2 million in 2019.
Noninterest expenses in the fourth quarter totaled $98 7 million and included onetime charges of $6 1 million for the closure of small branches of the reduction of cash only Atms and 800000 related to the true up of amortization of an investment.
Adjusting for these onetime items totaling $6 $9 million noninterest expense in the fourth quarter was $91 8 million.
The increase from the third quarter was primarily due to increases in variable expenses related to stronger revenue growth in loan and deposit production.
Accruals for corporate incentives in the fourth quarter increased to $3 1 million, but continued to be lower than the comparable period in 2019, which was $4 9 million.
For 2021, we expect noninterest expenses will be flat to 1% higher than 2020 reported expenses of approximately $374 million.
Included in the estimate.
Is the return of variable compensation to more normal levels.
As a reminder of the first quarter expenses will include our usual seasonal payroll expenses, which are expected to be $2 million to $3 million.
The effective tax rate for the fourth quarter of 2020 was $16, 87% low.
Our effective tax rate included a $1 6 million return to provision adjustment.
Currently we expect the effective tax rate for 2021 to be approximately 23%.
Our loan portfolio increased $146 million of one 2% linked quarter and $949 million or eight 6% year over year.
Growth was driven by strong commercial and mortgage production.
PPP loan payoff of waivers was 16 million most of it.
Quarter.
Our strong deposit growth continued in the fourth quarter.
Groups by $473 million or two 7% linked quarter, and $2 4 billion or 15, 4% year over year.
During the quarter for consumer and commercial deposits grew by $587 million, while public time deposits were reduced by $72 million.
As a result of continued strong deposit growth during the fourth quarter. We continued to deploy a portion of that excess liquidity into our investment portfolio and increased balances to $7 1 billion.
Premium amortization during the quarter was $9 $6 million the duration of the portfolio was three three years at the end of the quarter and well within our risk tolerances AAA.
AAA rated securities represented 96% of the portfolio balance and 100% remain day rate at or better.
That's our investment portfolio remains a stable and secure source of liquidity and funding for our balance sheet.
Our return on assets during the fourth quarter was <unk>, 83%. The return on equity was 12, 6% our efficiency ratio was 59, 8%.
Our net interest margin in the fourth quarter of 248%.
Adjusting for the one time $3 million leverage lease impairment, which reduced the net interest margin by six basis points.
Margin for the fourth quarter was 254% lower by 13 basis points from the third quarter.
The decline in the margin and net interest income in the fourth quarter of 2020 reflects the ongoing impact of lower interest rate environment as well as strong liquidity liquidity levels, partially being offset by growth in loans and investments.
In 2021, we expect the margin will decline three to four basis points per quarter stabilized in the fourth quarter at approximately $2 four to four 5% fees.
These estimates exclude the impact of PPP loans prepayments and from the new PPP loan program.
We maintained our strong risk based capital levels and our CET one ratio ended the year at 12.06%.
During the fourth quarter, we paid out $26 9 million or 63% of net income and dividends.
Our share repurchase program remains suspended.
And finally, our board declared a dividend of <unk> 67 per share for the first quarter of 2021.
Now I'll turn the call over to Mary. Thank you Dean at the end of the quarter. The loan portfolio net of PPP balances totaled of 11 4 billion remained 60% consumer and 40% commercial with 78% of the portfolio of secured with high quality real estate with a combined average loan to value of 56%.
We believe this portfolio of constraints built on consistent conservative underwriting and disciplined portfolio management will continue to provide a superior outcome and allow us to continue to support our customers and community through these unprecedented times.
As you May recall, we elected to provide initial payment relief of up to six months, where customers given the degree to which Hawaii was impacted by Covid. The provisions reported under the care Act and our capacity to do so accordingly, the majority of our deferrals began to return to normal payment schedules in the fourth quarter and as of January <unk>.
'twenty, one customer's loan balances on deferral, we're down to $428 million or three 6% of total loans, 86% of the loans remaining of deferral or secured with our consumer residential deferrals, having a weighted average loan to value of 65% and our commercial deferrals, having a weighted average loan to value.
<unk> up 47%, 90% of the loans of the commercial loans excuse me are on to that are on deferrals continue to pay interest.
Credit metrics remained strong and relatively stable in the fourth quarter, we realized net recoveries of 300000 for the quarter as compared with net recoveries of $1 5 million in the third quarter and net charge offs of $3 7 million in the fourth quarter of 2019 non.
Nonperforming assets totaled $18 5 million were 15 basis point of it.
Period, and flat for the linked quarter and down one 6 million or three basis points year over year low.
Once delinquent 30 days or more were $36 5 million or 31 basis points at the end of the fourth quarter up from $23 2 million or 20 basis points at the end of the third quarter as deferrals begin to end customers returned to normal payment schedules criticized loan exposure increased 50 basis points to two <unk>.
Six 3% of total loans, 60% of this exposure is secured by commercial real estate with a weighted average loan to value of 58%.
The provision for the allowance for credit losses was $12 5 million for the quarter reached with net recoveries of 300000 resulted in a $12 8 million dollar increase bringing the total allowance to $216 3 million and the ratio of the allowance to total loans to one 8% or 189.
<unk> net of PPP balances the increase this quarter reflects the company's credit risk profile and the current economic outlook and forecasts for our market, while continuing to provide for the potential downside risk inherent with the pandemic.
The reserve for unfunded commitments was $2 4 million at December 31 up 34000 from the third quarter I'll now turn the call back to Peter.
Great. Thank you Mary.
I'd like to finish off with just a.
Little bit of discussion around how we see 'twenty and 'twenty, one shaping up in the macro environment and what we intend to how we intend to respond to that so on the what you see on slide 20 is.
Obviously activity impacted by the broader consequence of the virus hopefully that trends better, but if we've learned one thing. This virus has turned out to be very awfully unpredictable and thats going to be somewhat compounded by the fact that we continue to be and despite even.
What's happened at the end of the year of reasonably accommodative monetary environment. So we see top top end.
Our topline opportunity as challenging not certainly not insurmountable, but at least challenging.
And then another interesting thing happening in what we witness in 'twenty and likely will continue to see into 'twenty one.
Of this pandemic has resulted in a real acceleration of what is already was already underway and the shift to digital channels within the commerce and services support space.
So our priorities for 2021.
Obviously still.
An uncertain period continued risk vigilance I think.
Goes without saying.
We need to support the recovery, we do feel as though of the Hawaiian economy has bottomed if you will and frankly bottomed at a fairly low place and we need to begin rebuilding and getting our community back to where it needs to get to and we intend to be a fulsome partner of that endeavor.
We need to lean into these shifts and evolving consumer preferences and behavior.
As we think about kind of the mid and longer term impacts of the pandemic. This may in fact be one of the extraordinary elements of of all of that happened in 2020, and then of course I talked about the top line challenges and really when you talk about leaning into digital you were talking about a fair amount of investment I think as you all know.
And so the ability to self fund that investment in growth.
It becomes a really important driver in how we really build out of our value proposition of <unk>.
<unk>.
In terms of supporting the economy, we come from an exceptionally strong position here great capital extraordinary liquidity position as we stand right now.
Our outreach.
I was really proud of how our bankers were able to connect in and keep tabs on our customers' strength through 2020, hopefully things get a little bit easier in 'twenty 'twenty, one, but obviously I'm biased here, but I think we've just got the best commercial and consumer bankers in the marketplace and they do a great job of customer outreach.
We have deep market knowledge, we've been here for 123 years and the West Pacific for 40, plus years, the use of our markets that we know.
We know them intimately when things are going great and even better when things arent going as well and then finally, a growing part of touching the customer has to do with digital and I'm really pleased that really from the past several years, we've been focused really in this space and we saw some some.
Some interesting movements of the slides I'll share with you in a few moments.
Really just.
I think really highlighted exemplify that.
So from our standpoint, we've been able to grow market share for for a number of years now in 'twenty 'twenty one despite the challenges of the year. We see no reason not to think of that that trend will just continue on.
So on to the consumer out of the evolution of consumer preference here, what we witness and I think of lot of banks witness was of rapid change in consumer preferences and behavior right at the on start of the pandemic. When you think about it that was call. It February or March of 2020 here we are.
In January of 'twenty one.
And probably the best case likelihood of of returned to normal.
Increasingly in People's minds is pushing out towards towards the end of 'twenty, one maybe in the fourth quarter of 'twenty, one or beyond so it is very reasonable to assume this is.
This period of.
Of behavioral force somewhat force behavioral change.
Could end up being an 18 to 24 months.
Period, that's awfully long I'm not sure what level of <unk>.
Re behavior snaps back.
And I think that snapback really is dependent on whether or not consumers find that they are changed behavior to be an enhancement or in convenience and I think there's growing evidence that people are thinking more along the enhancement side versus the inconvenience side and so one of the things that we're really focused on is in detour.
Terminating.
You know what what level of change really represents the new normal and increasingly we believe that.
Digital adoption was already happening we all know that we've been talking about it for an awful long time, but really with the pandemic is represented as just an exceptional acceleration of that trend.
And one that obviously I think we as an industry need to be prepared for.
So in the next four slides really share with you kind of our story. If you will in terms of changed behavior here, which you see on slide 24 is in versus in person branch transactions, which had been incredibly stable for for an awful long time of kind of.
Winnowing down gently over the past several years, but we get to March of of.
2020 really of the onslaught of of the pandemic and our branch transactions dropped two dropped by 49%. So that's both on a year on year basis as well as on a year to date basis and what we've seen really since March is just an awfully flat.
Transaction line.
So will that bounce back at some point as we get back from the new normal probably two of certain extent, but probably not nearly.
Two two of the original levels pre pandemic.
On the next slide you see how our consumers are choosing to work with US here in 2019, you see that 22% of our deposit customers where digital only customers.
17% branch only customers.
Fast forward, a year and that number on the digital only fronts accelerated to 31% and on the.
Branch only side fallen to 11%, so a pretty meaningful move in the span of a year.
When you look at deposits half of our branch transactions our depository in nature.
And really thought we had gotten awfully digital.
Last couple of years getting.
Branch transaction deposits down to about 60%.
Come the pandemic.
First quarter of last year, and basically that number fell to kind of a new standard of about 40 plus percent. So now we're running about 44% of our total consumer deposits coming in through the branches of less than half the balance being picked up through electronic channels.
Deposit Atms as well as on mobile devices.
And then finally on page 27.
<unk> C is the evolution of our zone products. So we are of Zelle bank. It seems to be a great product working for US and has we thought had a good consumer adoption. So we went in place June of 2019, and you see a pretty nice riser. We were we were pleased with outperformance of what you see.
When you get to March of 2020 of Independencia. Nick is it since then really through the end of last year December 'twenty.
Zelle transactions had almost doubled.
So really a phenomenal outcome there.
So.
To sum it up we see the shift we think the pandemic has accelerated that shift we have been focused on <unk>.
<unk> pro fitting our own organization, if you will to to be not just our traditional physical bricks and mortar organization, but a pretty darn good digital organization as well.
That takes.
That takes money.
Think of as everyone on this call understands that and so one of the elements. It's been very important to US is the ability to effectively self fund a lot of that growth through gaining efficiencies just throughout whatever opportunity. We can find we now believe that that is a core competency of bank of Hawaii, We view it strategically and we are long term.
And how we how we rollout many of these programs. It is internally driven and that obviously you need new skill sets to.
So really drive and lean into this process, we chose to hire of those skill sets of instead of rent those skill sets from a console tens of basis.
We think it's the right decision has really turned out to be.
A good outcome for us and finally this stuff is I think we've got the bulk of our.
Of our spend in the bag at this point, but it is never ending and there will always be opportunities to spend more we intend to do that.
On page 29, you see a five year snapshot of our expense line. So.
<unk> 2015 spent $348 million.
Non interest expense fast forward five years to this past year, we spent $3 74 at the one 4% CAGR against the hung low inflation rate of one 9%. So we feel generally pretty good about that we're able to bring overall head count down about 7% over that same period.
Important to note however that when you look on the next page.
On that one 4% includes an awful lot of.
Of innovation investment so built into that run rate of $3 70 for 2020 run rate is about $40 million and innovation expense that wasn't there previously if you go back five years, we'll go back to 2015 were putting really kind of of <unk>.
<unk> level of a couple of million dollars a year into into these initiatives now it's a real business.
And it's been challenging we've had to.
Really.
Rebuild our it capacity not that it wasn't acceptable.
But it was good for the 20th century, and not really prepared for the 21st century and so that's meant.
One important but somewhat mundane things like router refresh or.
Server refresh or Wi Fi refresh of desktop refresh all of these things that you have to do over and above just having a core core capability in place and then obviously, we spilled into at a meaningful meaningful way into the digital environment and the digital marketing data analytics CX.
From customer experience as well as operating efficiencies.
I mentioned that our FTE count was down 7% over that five year period, ending in 2020 that is inclusive of a buildup of about 80, Ftes really populating and.
Helping to Colonise of lot of these these new initiatives new initiatives.
On the next page you see simplify arena. So simplify some of you know probably not all of you.
Our digital sub brand. So basically we use simplify really to help highlight the digital commerce and support efforts of the organization. It launched in 2017, and we're proud of through of third party verification that we have about a 33% name recognition already so the marketing team has done a nice job there just recently.
We entered into a 10 year, namely agreement with the University of Hawaii. It what was the stature of center.
Stature of center as the main of most prominent arena sports venue in the state it's in some ways of Crown jewel.
Attendance venue.
C N 10000 people and we renamed it instead of renaming it.
Bank of Hawaii Arena, which I don't think we've gotten there's a lot given the breadth of our brand name.
Aimed at simplifying arena by bank of Hawaii, and really the intent. There is just to continue to proliferate. This digital concept within within the bank of Hawaii Brown.
So to finish off here just to give you a sense of on what we have programmatically of 2021.
We are.
Just underway and the closure of 12 in supermarket branch format branches.
That will take place.
Of the time in the next couple of months, we also with the separate.
Retailer are sunsetting of about 50 cash dispensing Atms as ATM volume sort of funds ATM volumes of fallen about 20% in the past year and obviously, what you saw with of Zelle trends people are finding ways to transact money differently.
These activities.
As you saw our embedded in our fourth quarter numbers 6.6 dollars 1 million in one time cost, but the benefits of $5 $1 million annually, which will begin to flow in I guess, starting sometime this quarter.
Another item that we have is a voice voluntary separation incentive program, so as turnover tightened a bit as the economy has gotten tougher.
We're trying to figure out ways to give our employees the opportunity.
To think sort of potentially new and better opportunities and we have a lot of long tenured employees some of whom are on the I guess on the brink of retirement and this program I think provides.
A lot of positive things and ways to help make that even more possible for them.
And something that we are not using wholesale through the organization, but we will probably increasingly used in pockets of the organization.
So just to close with some thoughts on our own bank of Hawaii competitive edge.
And building innovation and building towards the digital future of.
So we've got a strong market position.
Have a non acquisitive history. So we have.
One single system to deal with it's a good system, we've been using it for years now we're comfortable with it. So we don't have spaghetti spring and lots of our I T areas, where single market footprint, which allows us to focus.
Management's not had to deal with transactions or financial crisis really over the past 20 years. So we have been focused on building the company.
And I think you all know us as a very measured return focused organization and as you really pushed through.
Now too.
Build out of lot of these new fangled projects and concepts, having that measured and having that return focus we found to be extremely helpful.
So before we turn it over to Q&A I just wanted to bank.
And recognize Sidney why Rick this will be Cindy's last earnings call with US Cindy has been with bank of Hawaii for 19 years.
She is stepping into a very well deserved retirement.
Cindy came to us from legacy Bofa Bank of the turn of the century and has been I think as you all know just constant professional and.
She turns of range over to Janelle Higa channel is seven years with bank of Hawaii She's of warrant graduate and has a lot of good experience in investment banking center on how we're looking forward to having you are carrying on the baton and with that we'd be happy to take your questions.
Thank you ladies.
Ladies and gentlemen, as a reminder to ask a question you will need to press Star then one on your telephone.
So on your question press the pound key.
Again, Thats star one to ask the question.
Standby, while we compile the Q&A roster.
Our first question comes from the line of Jeff Lewis with D. A Davidson your line is open.
Thanks, Good morning.
And Jeff.
Got it.
<unk>.
I thought the consumer digital adoption of slides were interesting so I appreciate that.
Yes.
Switching gears on the.
I guess as the industry moves towards more of a reserve release, you continued to grow the reserve I just wanted to kind of check in with that and yes.
You touched on it a bit maybe it's colored by the euro sort of projections, maybe a little more customized to the local market but.
I don't know Peter Barry if you want to touch on kind of where you think you are relative to the kind of day.
National Backrow trends.
Yes, Jeff Let me, let me start and American clean up whatever that's like rate here, but I think so.
It's clear and it's well documented that Hawaii is lagging the rest of the country of bit by unemployment.
In near term I think recovery prospects of its just going to take us a bit to spool up here.
So I think that plays a bit into our <unk>.
Provisioning and therefore reserve reserve holds.
It is important to note the trajectory.
Of our of our provisioning. So you were down pretty smartly from the prior quarter still 15 of house were $15 million is a good amount of change, but as we look forward I think there is the potential on theres the opportunity for that continuation of trajectory, if you will and barring any other.
Crazy unforeseen things happening and that's well that's well on recommend looking at it as we see it.
Or anything.
The only thing I'd add is we've really been focused on two things the deferrals in our high risk industry exposure and clearly we're seeing positive outcomes, there, which also led to our thoughts around reducing the reserve and we've continued to be prudent, though and really ensuring that we're prepared for any downside risk and that's been our approach.
Okay.
Other question was on I, just wanted to make sure the debt cost savings from that branch consolidation that most recent round was included in the guidance for bank Dean said flat to up 1%.
Yeah.
As Jeff and just kind of show you how.
Net breaks out.
About half of that savings as FTE savings.
<unk> portion of the small portion of those already of achieved because obviously as the branches of prepared for this action they've taken their own hiring.
Approaches, but the majority of that savings or rate will flow into 2021.
Okay.
I guess its what.
Blurs the lines of little bit, but in terms of.
Kind of your digital investments.
And looking forward to.
More to come if you were to kind of.
Optimize the branch network as you have for years I suppose.
Your statement that it's kind of a never ending.
I guess.
The very short run at near term additional tranche of of branches is that on the.
On the docket or it's sort of an evolving this is of this as a chunk here of them well.
Digest that and maybe from your visit.
Yeah, probably probably more on the evolving side, so we will.
With with these with these closures, Jeff will be down to 50.
<unk> and more probably more meaningful for your analysis is if you go from 2014 to today, our branch footprints down about 26% by square footage.
Back then it was 312000.
So we are approaching.
I think where we would be comfortable.
On branch <unk>.
Square footage wise, I think theres still obviously opportunities to bring that down.
I think the other good outcome here is that when we look at our kind of of the branches that we have in place now.
60% of them.
Have been.
Highly renovated.
So from a brand standpoint, they're completely up to spec.
On that remaining 40% is a lot of them are smaller much smaller branches of lot of them in more rural areas. So in terms of capital spend to get the branch network to spec to where we want it to be.
I'd say, we're probably 80% complete there.
So you're right. We will continue that kind of on zig and zag in jigsaw that opportunity and likely down but a lot of what of that good works been done already.
Great Okay.
Is it from me and Sidney Congrats on retirement best of luck and welcome Jim.
Yeah.
Thank you Jeff.
Thank you.
Thank you.
Our next question comes from the line of Abraham from the Waller with Bank of America Securities. Your line is open.
Good morning, guys.
Abraham.
Just following up on the consumer thing.
We've been talking to bank investors.
So.
Just finally that you went through this consumer strategy.
Would you be doing more Peter like should we should you be making more investments and accelerating some of that understanding that you've been very disciplined on the expense from but given the pace of change on what's going on.
Talk to us in terms of.
If you wanted worried about this quarterly sort of lending cycle would you be doing more in terms of on the digital from big in terms of revenue growth client acquisitions.
No well.
It's a good question and it is the rate question.
I can't I can't think of a project that we have.
The Red light on.
Because it would just create too much expense drag on our on our operations. So we've actually looked at it the opposite way Abraham.
That way is to really identify the things we need to get done to be as competitive as we want to be and then figure out how to get the expense efficiency.
As an afterthought through that and today, we've been we've been we've been fortunate.
I'll tell you one thing that I feel good about so to answer your question no. There there's more expense spend to be done.
I think that the slope begins to flatten out.
A bit for sure and the reason why is because.
Outwards of half of that $40 million.
Spent really getting the core it infrastructure into place and so that's obviously software cost debt.
Depreciation and Thats hiring people, we've hired a ton of it.
And data folks and the like just to kind of get that infrastructure in place on that that's largely done that gives us some level of scalability as we move forward. Another important element is getting senior leaders and.
Areas like digital marketing and data analytics and things like that in place those are challenging assets to find and make sure work with the organization, we feel great about that and that's that's showing up in that $40 million as well. So there's more spend to come but we've got a great base in place at this point with <unk>.
Gives us some scale and so I think what we'll see is a flattening of that slope, which frankly when you looked at a little scary isn't it.
Got it understood and.
Just following up on.
I wanted to just better understand the margin outlook.
Last quarter, you had a guidance of six to seven basis points compression when I look at the 254 versus the 267 of those 13 basis points, let's talk to us in terms of how much of debt excess compression of liquidity driven and we.
We had expectations on on the excess liquidity on the cash balances that you expect of caddy as of year moves out.
Yes.
Additional liquidity.
About three to four basis points. So when you adjust for that it was we would have been down maybe a basis point or two more than what I had guided to.
We expect to deploy.
As much cash as a prudent still.
On putting money into the investment portfolio.
But that serves as a liquidity doubt for us because we can cut that off pretty quickly to fund any kind of loan growth that we have but.
But we do expect to continue to grow deposits this year.
Somewhere in the.
4% range, but.
That includes some maybe stimulus money.
We expect to receive.
But we still have a lot of liquidity on the balance sheet.
Got it and just sort.
Separately in terms of non growth obviously.
You, probably see a little bit more of a pickup in the economy on the back half, but Peter touched on on like where you expect loan growth to us is somewhere.
Some more runoff doing deals.
Yeah, So I think.
So we got we got three 8% loan growth in 2020 net of the PPP.
Which I thought was given the the insanity of the year was a pretty good mark.
A lot of that came from our commercial mortgage team.
Corruption ramped up and the great thing about the construction side is those are effectively of central projects.
That happened irrespective of what's happening with the pandemic that are affordable housing projects. So there's some durability there.
I think that both of those segments.
Could outperform again in 2021.
Home equity was.
A bit of a laggard in 'twenty and 'twenty, one really as a result of of having accomplished its big brother residential mortgage.
But it seems like we were able to figure out ways late in the year to at least flatten that product. So I think that that kind of net net represents an opportunity in indirect it's been amazingly durable and we're only playing of the very top end of that market potentially that comes together positively in 'twenty, one so I think.
<unk> only of the other consumer which is installment for US I think we'll probably can see the sea of bleed, there, which is not surprising or frankly.
Disappointing.
So my sense is that if we can hit.
Single.
Mid single digit loan growth for the year.
That would feel pretty good and I think is kind of on the cusp of achievable all things dependent on what happens with the virus outcome rate.
Alright that was good color Peter Thank you and Cindy congratulations.
Hey, Joe you of the timing, we'll miss talking to you, but thanks again for taking my questions.
Thank you.
Thank you.
Our next question comes from the line of Andrew Liesch with Piper Sandler Your line is open.
Hi, good morning, everyone.
<unk>.
I just wanted to touch on the non interest income guidance curious like what is that assuming for mortgage banking revenue I think it's safe to project that there'll be less.
This year than last year, but what does that assume for COVID-19.
Gain on sale.
So couple of things. So, yes, we did have a pretty extraordinary quarter.
Fourth quarter.
On the gain on sale was pretty wide was over 4% what we're seeing recently as it's coming down to below 4%.
And then we built in a little bit of it.
Of the conservatism based on volume.
Interest rates were to rise.
We could see a drop off there so it would be somewhat more.
Throughout the years, what we have forecasted a net number.
Got it okay.
Helpful.
Of covered most of my other questions but.
The other one on some modeling of tax rate of.
End of surprises here near 23% is there anything in that causing it to <unk>.
From where its been the last couple of years.
The guidance was 22%.
Right.
Yes.
Couple of things there on one is that.
We expect income to be a little bit higher this year, so that kind of.
Pushes the effective tax rate higher.
Other thing was there was some exploration of some grandfather.
Reductions of that expired in 2020, so in 2021, we won't have that.
Yes.
That's helpful. You've covered all my other questions. Thanks.
Tech Center.
Thank you.
Ladies and gentlemen that star one to ask the question.
Our next question comes from the line of Jackie Bohlen with <unk>. Your line is open.
Hi, good morning, everyone.
Hi, Jackie.
And.
To talk about the margin a little bit more and Justine when you when you think about your forward contraction.
Sony and are you seeing with that meaning that are you assuming some pretty low reinvestment rates of cash into securities are you, assuming just really high level of.
Liquidity remain on balance sheet.
Just trying to get a sense of what kind of inputs go into that forecast.
Yes, there are several things I mean, one is just kind of.
Take the liability side, we are.
Kind of coming to the eye.
I'd say closer to the bottom of deposit rates.
Been managing debt lower quite a bit and I think the opportunities there are little bit limited.
On the asset side, we do have quite of bit of fixed rate assets, the mainland of residential mortgage and investment portfolio of debt.
Still we will have some decrease in yields.
Kind of offsetting that are stabilizing that would be on some of our floating rate.
Loans that already are.
No.
Have factory on in terms of yield already so when you take all of that into account theres still going to be some erosion in the margin just reprice.
Repricing of the fixed rate assets and Thats, how we got to the guidance.
Okay, great. Thank you that's very helpful and I mean, I'm, assuming that you kind of thoughts on loan growth.
The deposits that were just asked on the call are also included in that outlook of balance sheet mix.
Yes.
Okay, great. Thank you every day.
I have already answered, but I just IQ one of echo. Thank you for all of the wonderful data in the back of the slide deck, just related to digital adoption and everything else Thats really helpful.
Andy we're going on we're going to Miss you.
Thank you.
Thank you Jackie.
Thank you. Our next question comes from the line of Laurie Hunsicker Compass point.
Your line is open.
Hi, Thanks, Good morning, Cindy I just wanted to say, it's been absolutely lovely working on floor. So now welcome.
I just wanted to go back to Andrew's question, because I think I had it wrong number written on my notes to the forecast in terms of tax rate for next year is 22% is that correct yes.
Yes 22.
Okay and then.
In terms of of PPP.
P. P. P fees that run all of Europe, I've known plenty of millions of how how much from millions of your fees and what was actually amortized this quarter.
So as of the end of the year, we had $10 4 million of remaining capitalized fees.
And then what we thought of the 16 million that paid down and we've about 370000.
Fees were accelerated.
373000 so.
I mean, so how.
How much in total fees were taken into net interest income this quarter.
The debt 300000.
The 300000, okay. Okay got it on for some reason I was thinking of a tire.
That's helpful and then.
Mary I appreciate the further update on deferrals as of January 21st of the $428 million do you have a breakdown in terms of of what is what is just very high level of C&I CRE.
And maybe on consumer.
Yes, thank you when seconds here.
So in terms of the deferrals.
For the commercial debt $312 million and $240 million is commercial mortgage 63 million C&I.
8 million leasing in terms of the consumer.
$126 million in residential and on this I'm sorry, Laurie is actually as of 12 31 number and I can get it for you for the $1 20.
Three of them are you know what I've got I've got the 12 31 breakdown I thought okay hang on maybe I do have the 123.
Yeah, No I just wanted to go because you had updated all of your deferrals totaled 490.
As of December 31st and then I thought I heard you right that you gave out of $428 million number as of January 21st.
Yes, I'm sorry, so let me give you that breakdown. So commercial is 299 and consumer 129 within commercial C&I was $57 million.
Commercial mortgage $234 million leasing 8 million.
And in terms of consumer residential mortgage was $89 8 million home equity of $21 seven auto 12, nine and other consumer which is our unsecured product of four seven.
Okay perfect.
Okay, Great and then I guess Peter last question.
I just wondered if you could maybe help us think about what you actually need to see in terms of we considering share buyback.
Dividend increases just how youre thinking about that more broadly and I realize there's a lot of unknown.
Okay.
Yes, So I think your last your last five probably highlighted it and Theres just a lot of unknowns. So.
On the idea of raising the dividend that's the space, where we try to be as conservative as possible and making those decisions as in we only wish to make one way of decisions areas, which are increases.
I think we're going to be a little conservative around dividend increases at this point Laurie.
And then secondly on on the buyback side. That's you know as you know much more of a tactical operation for us as as conditions warrant and and again I'm just not I think I think maybe as we begin to get towards the back half of this year.
And begin to see a little more certainty around the uncertainty of being taken out of the market.
I think that we will begin to have those discussions internally with our with our directors.
As a as a as a lever.
So I guess, what I'm, saying is neither of probably on the table near term 'twenty, one but look to see what happens later 'twenty one condition wise and.
I Hope I hope, we can hope we can have those conversations.
Great. Thanks, so much.
Yes.
Thank you.
I'm showing no further questions in the queue I will now turn the call back over to management for closing remarks.
Yeah.
I'd like to thank everyone again for joining us today for your continued interest in bank of Hawaii as always if you have any additional questions or need further clarification on any of the topics discussed today. Please feel free to contact me thanks, everyone take care.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
Okay.
[music].
Okay.