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ladies and gentlemen thank you for standing by and welcome to the bank of hawaii corporation fourth quarter 2020 earnings call at this time all participants are in a listen only mode after the speaker's presentation there will be a question and answer session to ask the question during this session you will need to press star then one on your telephone please be advised that today's conference is being recorded if you require any further assistance please press thought then zero i would now like to end the conference over to your speaker for today cindy warwick 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 2020. on the call with me today is our chairman president and ceo peter ho our chief financial officer dean shigamura our chief risk officer mary sellers and janelle higa 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 result may differ materially from those projected during the call this morning we'll be referencing a slide presentation as well as the earnings release a copy of this presentation and the release are also available on our website boh.com under investor relations and now let me turn the call over to peter ho thank you cindy good morning everyone good afternoon um i'm going to touch a little bit on the hawaii market and i'll turn it over to dean and to marry the 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 uh to begin with though i'd say quarter four uh represented at good quarters a little bit noisy but generally we saw a stabilizing economy uh good revenue and balance sheet growth good expense management when you cut through a bunch of noise in there again fortress capital and a terrific liquidity position an improving loan deferral population that mary will touch on and then finally i think as we step into 2021 we're awfully uh well prepared to take on the challenges of this year um let me touch on the economy for uh for a bit uh on a few slides here what you see here is hawaii unemployment uh really that those twin towers in april and may of 23.6 and 23.4 percent representing effectively our high water mark as we stepped into the pandemic and then winnowing down um slowly uh down slowly i guess is the catchphrase but still stubbornly high relative to pre-pandemic levels uh q4 forecast is coming in at about 13.5 which represents a bit of an improvement from the prior quarter and then the forecast looking forward into q1 is for a little bit of erosion in that number as we get through the holiday activity as well as i think contribute to some of the infection rates that we're seeing on the mainland in particular our west coast uh markets which uh have a bigger impact on us uh than some other markets uh this is the longer term outlook for inflation on i'm sorry unemployment on page five here you see the forecast as of 1211 has been bumped up modestly and again that really is speaking to two things uh one um a um infection rate i think probably above what we had anticipated and an infection rate occurring as i mentioned in some of our more strategic locations on the u.s mainland was probably not as embedded in this in this forecast after talking with the hero folks is the amount of stimulus that is now looking uh what i would call possible and so this this forecast was really built around a level of stimulus but probably more on the moderate side from where i think most people's minds eyes are right now we've learned to gdp and personal income um you see in 2020 in the dark blue the the [Music] the forecasted down 10 percent it's actually a slight improvement from um from the priors prior year's forecast really more for adjustment basis um as we look into 2021 basically what you hear is forecasting is basically a flat line across where we ended up in 2021 and then a bounce back in 2022 on the brighter side personal income levels um actually um 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 fiscal side into into our system certainly hawaii as a beneficiary of about 10 billion dollars enjoyed that surplus as well a bit of a dip in 2021 is forecast again i mentioned that this forecast was done with probably a little bit more of a little more sober view around the possibilities for stimulus in 2021 so maybe there's some room for 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 5.2 percent for single family homes two point four percent for condominiums uh december on december numbers are are even stronger at six point one percent and six point nine percent respectively and and inventory conditions continue to be very tight so days on market for single families 14 days days on market for condominiums 24 days still very much a seller's market if you will i'll finish on the infection or i'm sorry let me turn to daily arrivals before i get the infection uh as i think most of you know we launched our safe travels program that that has been um after a few uh fits and starts and snafus i think a pretty well received program we're actually getting to what i call more of a normal state of operation there and what you see is 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 to 30 percent of prior year and likely to to wind out at that level uh short of the pandemic cooling itself for 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 um you know still a very very good story for hawaii uh you know the isolation that i mentioned has created challenges for us from a travel and a visitor industry standpoint works the other way for us on the infection side so hawaii really much through the the entire entirety of the pandemic has been one of the safer places in the country i'd say by infection average per day per 100 000 people so that's that's a little snapshot on the local marketplace now let me turn it over to dean who will give you uh some of the financial highlights dude thank you peter net income for the full year of 2020 was 153.8 million or 86 cents per share net income for the fourth quarter was 42.3 million or one dollar six cents per share net interest income for 2020 on a reported basis was 496.3 million dollars down 1.4 million from 2019. net interest income in the fourth quarter was 119.5 million included in the fourth quarter net interest income was a one-time reduction of three million dollars for an impairment of a leveraged lease excluding the impairment from the fourth quarter net interest income was 122.5 million a decrease of 1.7 million from the previous quarter and 1.4 million from the same quarter in 2019 we recorded a credit provision of 15.2 million dollars this quarter which includes 2.7 million to establish a reserve for interest associated with deferrals non-interest income for the full year of 2020 was 184.4 million dollars an increase of 1.1 million from 2019. non-interest income totaled 45.3 million in the fourth quarter the increase in the fourth quarter was from from the prior quarter was driven by strong mortgage banking income and customer derivative revenue non-interest income in the fourth quarter of 2019 included a gain of 3.8 million related to the early bio of the leveraged lease adjusting for this one-time item non-interest income in the fourth quarter of 2020 increased 1.4 million on the fourth quarter 2019 despite the ongoing challenges of the pandemic we expect non-interest income in 2021 to be approximately 42 to 43 million dollars per quarter although non-interest 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 expense for the full year of 2020 was 373.8 million dollars a decrease of 1.4 compared with 379.2 million in 2019 non-interest expenses in the fourth quarter totaled 98.7 million and included one-time charges of 6.1 million for the closure of both branches and the reduction of cash-only atms and 800 000 related to the truth of amortization of an investment adjusting for these one-time items totaling 6.9 million dollars non-interest 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 and 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 non-interest expenses will be flat to one percent 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 the first quarter expenses will include our usual seasonal payroll expenses which are expected to be two to three million dollars the effective tax rate for the fourth quarter of 2020 was 16.87 the lower effective tax rate included a 1.6 million dollar return to provision adjustment currently we expect the effective tax rate for 2021 to be approximately 22 percent our loan portfolio increased 146 million dollars on 1.2 link quarter in 949 million or 8.6 percent year over year growth was driven by strong commercial and mortgage production ppp loan payoff and waivers were 16 million dollars for the quarter our strong deposit growth continued in the fourth quarter was reduced by 473 million dollars or 2.7 link quarter and 2.4 billion or 15.4 year over year during the quarter poor 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 continue 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 dollars the duration of the portfolio was 3.3 years at the end of the quarter and well within our risk tolerances aaa rated securities represented 96 of the portfolio balance and 100 remained a-rated or better thus 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 0.83 the return on equity was 12.26 and our efficiency ratio was 59.88 net interest margin in the fourth quarter was 2.48 adjusting for the one-time 3 million leveraged lease impairment which reduced the net interest margin by 6 basis points the margin for the fourth quarter was 2.54 lower by 13 basis points from the third quarter the decline in the margin and net interest income during the fourth quarter of 2020 reflects the ongoing impact of the 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 in the fourth quarter at approximately 2.4 to 2.45 percent these estimates exclude the impact of ppp loan prepayments and from the new ppp loan program we maintained our strong risk-based capital levels in our cet1 ratio end of the year at 12.06 percent during the fourth quarter we paid out 26.9 million dollars or 63 of net income and dividends our share repurchase program remains suspended and finally our board declared a dividend of 67 cents per share for the first quarter of 2021. now turn the call over to mary thank you dean at the end of the quarter the loan portfolio net of ppp balances totaled 11.4 billion and remains 60 consumer and 40 commercial with 78 of the portfolio secured with high quality real estate with a combined average loan to value of 56 we believe this portfolio construct built on consistent conservative underwriting and discipline 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 for our customers given the degree to which hawaii was impacted by covet the provisions afforded 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 21 customer loan balances on deferral were down to 428 million or 3.6 percent of total loans 86 of the loans remaining at deferral are 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 of 47 90 percent of the loans of the commercial loans excuse me are under that are on deferral continue to pay interest credit metrics remained strong and relatively stable in the fourth quarter we realized net recoveries of 300 000 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-performing assets totaled 18.5 million or 15 bases point at period n flat for the link border quarter and down 1.6 million or three basis points year over year loans 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 began to end and customers returned to normal payment schedules criticized loan exposure increased 50 basis points to 2.63 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 which with net recoveries of 300 000 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 1.8 percent or 1.89 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 34 000 from the third quarter i'll now turn the call back to peter great thank you mary i'd like to finish off with um just a little bit of discussion around how we see 2021 shaping up in the macro environment and and what we intend to uh how we intend to respond to that so 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 that's going to be somewhat compounded by the fact that we continue to be in despite even what's happened at the end of the year a reasonably accommodating monetary environment so we see top top end or top line opportunity as challenging not certainly not insurmountable but at least challenging and then another interesting thing happening and what we witnessed in 20 and likely we'll continue to see into 21 is that this pandemic has resulted in a real acceleration of what has already what was already underway in 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 uh you know we need to support the recovery we do feel as though the hawaiian economy has bottomed if you will and frankly bottomed at a fairly low place and we need to begin rebuilding and ge ting our community back to where it needs to get to and we intend to be a fulsome partner in that endeavor we need to lean into these shifts in evolving uh consumer preference and behavior um i think 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 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're talking about a fair amount of investment i think as you all know and so the ability to self-fund that investment and growth uh becomes a really important driver in how we really build out our value proposition at boh in terms of supporting the economy we come from an exceptionally strong position here great capital uh extraordinary liquidity position as as we stand right now uh customer outreach um you know i was really proud of how our bankers were able to connect and and and keep tabs on our customers straight through 2020 hopefully things get a little bit easier in 2021 uh but obviously i'm biased here but i think we just got the best commercial and consumer bankers in the marketplace and they do a great job of of customer outreach we have deep market knowledge we've been here for 123 years in the west pacific for 40 plus years these are our markets that we know we know them intimately when things are going great and even better when things aren't going as well and then finally you know a growing part of touching the customer has to do with digital and i'm really pleased that really for the past several years we've been focused really in this space and you saw some some um some interesting movements and slides i'll share with you in a few moments uh that really just i think really highlighted exemplify that uh so from our standpoint we've been able to grow market share for for a number of years now in 2021 despite the challenges of the year uh we see no reason not to think that that trend will just continue on so on to the consumer uh or the evolution of consumer preference here what we witnessed and i think a lot of banks witnessed was a rapid change in consumer preference and behavior right at the onstart of the pandemic when you think about it that was called february march of 2020 here we sit in january of 21 and probably the best case likelihood of a return to normal i think increasingly in people's minds is pushing out towards towards the end of 21 maybe into the fourth quarter of 21 or beyond so it's very reasonable to assume that this um this uh period of uh behavioral force somewhat forced behavioral change you know could end up being an 18 to 24 month uh period uh that's awfully long i'm not sure what level of re uh re-behavior snaps back uh and i think that snapback really is dependent on whether or not consumers find that their changed behavior uh to be an enhancement or inconvenience 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 determining you know what what level of change really represents the new normal and increasingly we believe that uh you know digital adoption was already happening we all know that we've been talking about it for an awful long time but really what the pandemic has represented is just an exceptional acceleration of that trend um and and one that you know obviously i think we as an industry need to be prepared for so the next four slides really share with you kind of our story if you will in terms of changed behavior here what you see on slide 24 is inverse in person branch transactions which have been incredibly stable for for an awful long time kind of winnowing down gently over the past several years but we get to march of uh of 2020 really the onslaught of the pandemic and our branch transactions dropped to drop 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 um transaction line um so you know will that bounce back at some point as we get back to the new normal uh probably to a certain extent but probably not nearly uh to to the original levels pre-pandemic on the next slide you see um how our consumers are choosing to work with us uh here in 2019 you see that 22 of our deposit customers were digital only customers uh 17 branch only customers um fast forward a year and that number on the digital only fronts accelerated 31 on the branch only side fallen to 11 so pretty meaningful move in the span of a year when you look at deposits half of our branch transactions are depository in nature and really thought we had gotten awfully digital uh the past couple of years getting branch transaction deposit down to about 60 percent uh 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 so less than half the balance being picked up through electronic channels easy deposit atms as well as our mobile devices and then finally on page 27 what you see is the evolution of our zell products so we are a zell 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 that performance but what you see when you get to march of 2020 and the pandemic is that since then really through the end of last year december 20 uh zell transactions had had almost doubled so really a phenomenal outcome there so um i guess to to sum it up we we see the shift we think the pandemic has accelerated that shift we have been focused on retrofitting 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 um that takes money i think i think as everyone on the call understands that and so one of the elements that'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 it's a core competency a bank of hawaii we view it strategically and we are long-term oriented in how we how we roll out many of these programs it's internally driven in that obviously you need new skill sets to uh to really drive and lean into this process we've we chose to hire those skill sets instead of rent those skill sets from a consultative basis which we think is the right decision has really turned out to be a a good outcome for us and finally this stuff is you know i think we've got the bulk of our of our spend in the bag at this point but it's 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 2015 spent 348 million uh in non-interest expense fast forward five years to this past year we spent 374 at the one point four percent kegger uh against the honolulu inflation rate of 1.9 percent so we feel generally pretty good about that we're able to bring overall head count down about seven percent over that same period um important to note however that when you look on the next page that 1.4 includes an awful lot of innovation investment so built into that run rate the 374 2020 run rate is about 40 million dollars in innovation expense uh that wasn't there previously if you go about five years i mean we go back to 2015 we were putting really kind of a hobby level of a couple million dollars a year into into these initiatives now it's a real business and it's been challenging we've had to really uh rebuild our i.t 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 you know you know important but somewhat mundane things like router refresh or server refresh or wi-fi refresh or 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've we've spilled into an immediate meaningful way into the digital environment in the digital marketing data analytics cx or customer experience as well as operating efficiencies i mentioned that our fte count was down seven percent over that five year period ending in 2020 that is inclusive of a buildup of about 80 ftes really populating and helping to colonize a lot of these these new initiatives new initiatives uh on the next page you see um simplify arena so simplify some of you know probably not all of you uh is our digital sub brand so basically we use simplify really to help highlight the digital uh commerce and support efforts of the organization it launched in 2017 and we're proud through a third party verification that we have about a 33 percent name recognition already so the marketing team's done a nice job there just recently we entered into a 10-year naming agreement with the university of hawaii at what was the stan share center the stan share center is the main and most prominent arena sports menu in the state it's in some ways the crown jewel attendance venue seating 10 000 people and we renamed it instead of renaming it bank of hoy arena which i don't think would have gotten us a lot given the breadth of our brand name we named it simplify arena by bank hawaii and uh really the intent there is just to continue to proliferate this digital concept within within the bank of hawaii brand um so to finish off here uh just to give you a sense on what we have programmatically in 2021 we are just underway in the closure of 12 in supermarket branch format branches that will take place sometime in the next couple of months we also with a separate retailer our sun setting about 50 cash dispensing atms as atm volumes have fallen atm volumes have fallen about 20 percent in the past year and and obviously what you saw with the zell trends people are finding ways to transact money differently these activities as you saw are embedded in our fourth quarter numbers six point no 6.1 million in one time cost but the benefits are 5.1 million dollars annually which will begin to flow in i guess starting sometime this quarter another item that we have is a voluntary separation incentive program so as turnover tightens a bit as the economy's gotten tougher we're trying to figure out ways to give our employees the opportunity to think through to potentially new and better opportunities and we have a lot of long tenured employees some of who are on the i guess on the brink of retirement and this program i think provides a lot of positive things and ways to to help make that even more possible for them and something that we are not using wholesale through the organization but we'll probably increasingly use in pockets of the organization so just to close with um some thoughts on our own bank of hoy competitive edge in in building innovation and building towards the digital future obviously we've got a strong market position uh we have a non-inquisitive history so we have um one single system to deal with uh it's a good system we've been using it for years now we're comfortable with it so we don't have spaghetti string in lots of rit areas we're a single market footprint which allows us to focus uh 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 and i think you all know us as a very measured return focused organization and as you really push through um how to um you know build out a lot of these newfangled projects and concepts uh having that measured and having that return focus we found to be extremely helpful so before we turn over to q a i just wanted to thank and recognize sidney weirich this will be cindy's last earnings call with us cindy has been with bank boy for 19 years so she is stepping into a very well-deserved retirement and cindy came to us from legacy b of a you know back at the turn of the century and has been i think as you all know just a consummate professional and she turns the reigns over to janelle higa janelle is seven years with bank of hawaii she's a wharton graduate and has a lot of good experience in investment banking so janelle we're looking forward to having you carry on the baton and with that we'd be happy to take your questions thank you ladies and gentlemen as a reminder to ask the question you need to press star then one on your telephone to withdraw your question press the pound key again that's star one to ask the question please stand by while we compile the q a roster our first question comes from the line of jeff rules with d.a davidson elan is open thanks good morning good job dr uh appreciate the i thought the consumer digital adoption slides were interesting so appreciate that um switching gears on the you know i guess as the industry moves towards more reserve release you continue to grow the reserve i just want to kind of check in with that and i think you touched on it a bit maybe it's colored by the your you hero sort of projections that may be a little more customized to the local market but um i don't know peter mary if you want to touch on kind of where you think you are relative to the kind of national macro trends yeah well jeff let me let me start and and mary can clean up whatever else i create here but i think you know i think it's it's clear and and it's well documented that hawaii is lagging uh the rest of the country a bit by unemployment and and near-term i think recovery prospects it's just gonna take us a bit to spool up here um so i think that plays a bit into our provisioning and therefore reserve reserve holds i think it's important to note the trajectory of our of our provisioning so we're down pretty smartly from the prior quarter still 15 and a half or 15 million dollars is is a good amount of change but as we look forward uh i think there's the potential and there's the opportunity for that continuation of trajectory if you will and barring you know any other crazy unforeseen things happening and that's the way i would that's the way i would recommend looking at it as we see it there anything uh the only thing i'd add is you know we've really been focused on two things the deferrals and 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 my other question was on i just wanted to make sure the the cost savings from that branch uh consolidation the most recent round was included in the in the guidance for i think dean said flat to up one percent yeah it is jeff and just to kind of show you how that uh breaks out um about half of that savings is is fte savings uh a portion a small portion of that has already been achieved because you know obviously at the branches they're prepared for this action they've they've taken their own hiring approaches but the majority of that savings are right will flow into 2021. okay and i i guess it's this where it blurs the line a little bit but in terms of kind of your digital investments um and looking forward to you know more to come if you were to kind of uh optimize the branch network as you have for years i suppose in your statement that it's kind of never ending um i guess in the very short run a near-term additional tranche of of branches is that on the on the docket or it's it's sort of an evolving this is a this is a chunk here and then we'll digest that and maybe your visit yeah probably probably more on the evolving side so we will um with with these with these closures jeff we'll be down to 50 branches and and more probably more meaningful for for your analysis is if you go from 2014 to today our branch footprint is down about 26 by square footage uh from you know back then with 312 000 um so we are approaching you know i think where we would be comfortable um ranch uh square footage-wise i think there's still obviously opportunities to bring th t down the i think the other good outcome here is that when we look at our you know kind of the branches that we have in place now about 60 of them um have been um highly renovated so from a brand standpoint they're completely up to spec uh that remaining 40 percent is a lot of them are smaller much smaller branches a lot of them in more rural areas so in terms of you know capital spend to get the branch network to spec to where we want it to be uh you know i'd say we're probably 80 complete there so you're right we'll continue to kind of zig and zag and jigsaw that opportunity and likely down uh but a lot of a lot of that good work's been been done already great okay so that's it for me and cindy uh congrats on the retirement best of luck and welcome thank you jeff thank you thank you our next question comes from the line of abraham punawala with bank of america securities your line is open good morning guys abraham i think just following up on the consumer thing like we've been talking to bank investors so it was timely that you went through this consumer strategy like should you be doing more uh peter like should we should you be making more investments in accelerating some of that understanding that you've been very disciplined on the expense front but given the pace of change and what's going on just talk to us in terms of if you weren't worried about this quarterly sort of uh earning cycle would you be doing more in terms of on the digital front beat in terms of revenue growth client acquisitions now well it's a good question and it you know it is the right question um i can't i can't think of a of a project that we have pushed the red light on because it would just create too much expense drag on our operations so we've actually looked at it the other the opposite way uh ibrahim and that that way is to really identify the things we need to get done to be as competitive as we want to be and then you know figure out how to get the expense efficiency um you know as an afterthought through that and today we've been we've been we've been fortunate um i'll tell you one thing that i feel good about um so to answer your question no there's there's more expense spent to be done i think that the slope begins to flatten out a bit for sure and the reason why is because um upwards of half of that 40 million was spent uh really getting the core it infrastructure into place and so that's obviously software costs that depreciation and that's hiring people we've hired a ton of i.t and data folks and the like just to kind of get that infrastructure in place and that that's largely done that gives us some level of scalability as we move forward another important element is getting senior leaders in you know areas like digital marketing and data analytics and things like that in place those are challenging assets to find and and to 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 which gives us some scale and so i think what we'll see is a flattening of that slope which you know frankly when you look at a little scary isn't it got it understood and i i guess just uh following up on dean uh i want to just better understand the margin outlook i believe last quarter you had a guidance for six to seven basis points compression when i look at the 254 versus the 267 it was 13 basis points just talked to us in terms of how much of that excess compression was liquidity driven and just now your expectations are on the excess liquidity of the cash balances that you expect to carry as the year uh moves on yeah the the additional liquidity was about three to four basis points so when you adjust for that it was um you know we would have been down you know maybe a basis point or two more than what i had guided to um you know we expect to deploy um as much cash as uh prudent you know we're still putting money into the investment portfolio uh but that serves as a liquidity valve for us because we can cut that off pretty quickly to fund any kind of loan growth that we have but we do expect to continue to grow deposits this year um you know you know somewhere in the you know maybe four percent range but uh you know that includes you know some maybe stimulus money that we expect to receive um but we still have a lot of liquidity on the balance sheet got it and just uh separately in terms of loan growth and obviously uh you probably see a little bit more of a pickup in the economy in the back half but peter any thoughts around like where you expect loan growth versus some more runoff during the year yeah so i think um so we got we got 3.8 percent loan growth in 2020 um net of the ppp uh you know which i thought given the the insanity of the year was was a pretty good mark um a lot of that came from our commercial mortgage team uh construction uh ramped up and the great thing about the construction side is those are effectively essential projects um that that happen irrespective of what's happening with the pandemic they're affordable housing projects so there's some durability there i think that both those segments could outperform again in 2021 home equity was a bit of a laggard in 2021 really as a result of having to comp with 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 uh in indirect it's been amazingly durable and we're you know we're only playing at the very top end of that market potentially that comes together positively in 21 so i think abraham only the other consumer which is installment for us i think we'll probably continue to see a bleed there uh which is not surprising or frankly um um disappointing uh so i i my sense is that you know if we can hit single bit you know mid-single digit loan growth for the year um that would feel pretty good and i think is kind of on the cusp of of achievable you know all things depending on what happens with the with the virus outcome right right all right no that was good caller peter thank you and cindy congratulations uh enjoy your retirement he'll miss talking to you but um thanks again for taking my questions thank you thank you our next question comes from the line of andrew lish with piper sander your line is open hi good morning everyone hi andrew um i just want to touch on the non-interest income guidance uh curious like what is that assuming for mortgage banking revenue i think it's safe to project that it'll be less uh this year than last year but what does that assume for uh for gain on sale so a couple of things so yeah we did have a pretty extraordinary quarter uh fourth quarter um the gain on sale was pretty wide was over four percent you know what we're seeing recently is it's coming down to below four percent um and then we built in a little bit of uh maybe conservatism um based on volumes that if interest rates were to rise you know we we could see a drop off there so it would be uh somewhat lower um throughout the years what we have forecasted in that number got it okay that that's helpful um you know you've covered most of my other questions but uh the uh only other one is on the modeling the tax rate uh it's kind of surprising to hear it near 23 is there anything in that causing it to rise from where it's been the last couple years uh the guidance was 22 percent yeah a couple of things there um one is that you know you know we expect income to be a little bit higher this year so that kind of pushes the effective tax rate higher um the other thing was there's uh some exploration of some grandfathered reductions that expired in 2020 so in 2021 we won't have that okay um that that's helpful you've covered all my other questions thanks thanks thanks senator thank you as a reminder ladies and gentlemen that's star one to ask the question our next question comes from the line of jackie boland with kbw your line is open good morning everyone hi i wanted to to talk about the margin a little bit more and justine when you when you think about your forward contraction how draconian are you being with that meaning that are you assuming some pretty low reinvestment rates of cash into securities are you assuming you know just really high levels of liquidity remain on balance sheet um you know just trying to get a sense of what kind of inputs go into that forecast yeah there are several things i mean one is just kind of to take the liability side we are kind of coming to the uh i would say closer to the bottom of deposit rates we've been managing that lower quite a bit and i think the opportunities there are a little bit limited on the asset side we do have quite a bit of fixed rate assets that mainly in the residential mortgage and investment portfolio that still will have some decrease in yields kind of offsetting that or stabilizing that would be you know are some of our floating rate loans that already are uh you know uh have factored down in terms of yield already so when you take all of that into account there's still going to be some erosion in the margin just uh repricing of the fixed rate assets and that's how we got to the uh guidance okay great thank you that's very helpful and i i mean i'm assuming that you know thoughts on loan growth and then um the deposits that were discussed on the call are also included in that outlook balance sheet mix yeah okay great thank you um everything else i have is already answered but um i just i too want to echo thank you for all the wonderful data in the back of the fly deck just related to digital adoptions and everything else that's really helpful and cindy we're gonna we're gonna miss you so thank you thank you jackie thank you our next question comes from the line of lori hunsicker with compass point your line is open yeah hi thanks good morning and and cindy i just want to say it's been absolutely lovely working with you and janelle welcome um i just wanted to go back to andrew's question because i think i had a wrong number written in my notes too the forecast in terms of tax rate for next year is 22 is that correct yes 22. great okay thanks and then um in terms of of um ppp fees that remain of your 528 million how how much remains of your fees and and what was actually amortized this quarter um so as of the end of the year we had 10.4 million of remaining capitalized fees and then what we out of the 16 million that paid down and were weighed about 370 000 in fees were accelerated 373 000. so i mean so how how much in total fees were taken into net interest income this quarter that 300 000. three just three hundred thousand okay okay got it um for some reason i was thinking that was higher okay that's helpful and then um mary i appreciate the the further update on deferrals as of january 21st the 428 million do you have a breakdown in terms of of what is what is just very high-level cni cre and and maybe um consumer yes i do one second here so in terms of the deferrals uh for the commercial that's 312 million 240 million is commercial mortgage 63 million cni 8 million leasing in terms of the consumer uh 126 million in residential and this i'm sorry lori is actually us of the 1231 number and i can get it for you for the 120 three numbers you know what i've got i've got the 12 31 breakdown i've got okay hang on maybe i do have the 123. yeah no i just wonder because you had updated all your deferrals totaled 490 as of december 31st and then i thought i heard you write that you gave out a 428 million number as of january 21st yes i'm sorry so let me give you that breakdown so uh commercial is 299 and consumer 129 within commercial cni was 57 million commercial mortgage 234 million leasing 8 million and in terms of consumer residential mortgage was 89.8 million home equity 21.7 auto 12.9 and other consumer which is our unsecured product of 4.7 perfect that's super helpful okay great and then i guess peter last question um to you i i just wondered if you could maybe help us think about what you actually need to see in terms of reconsidering share buybacks dividend increases just how you're thinking about that more broadly and i realize there's a lot of unknowns thanks so much yeah i i i think your last your last thought probably highlighted it and there's just a lot of unknown so um the i you know the idea of uh raising the dividend you know that's a space where uh we try to be as conservative as possible in making those decisions as in you know we only wish to make one-way decisions there's which are increases so i think we're going to be a little conservative around dividend increases at this point lori and then secondly on the buy-back side that's you know as you know much more of a tactical operation for us as as conditions uh 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 being taken out of the market i think that we would we'll begin to have those discussions internally with our with our directors as as a as a as a lover so i i guess what i'm saying is neither are probably on the table near term 21 but look to see what happens ladder 21 condition wise and uh you know i i hope i hope we can hope we can have those conversations great thanks so much yep thank you i'm sure no further questions in the queue i will now turn the call back over to management for closing remarks 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 janelle and me thanks everyone take care and gentlemen this concludes today's conference call thank you for your participation you may now disconnect everyone have a wonderful day you