Bank of Hawaii Corp (BOH) 2020 Q4 法說會逐字稿

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

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 2020.

On the call with me today is our Chairman, President and CEO, Peter Ho; our Chief Financial Officer, Dean Shigemura; our Chief Risk Officer, Mary Sellers; and 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 results 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, or good afternoon. I'm going to touch a little bit on the Hawaii market. And I'll turn it over to Dean and to Mary 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.

I'll begin with, though, I'd say quarter 4 represented a good quarter. It's a little bit noisy. But generally, we saw a stabilizing economy, 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 well prepared to take on the challenges of this year.

Let me touch on the economy for a bit on a few slides here. What you see here is Hawaii unemployment. Really those twin towers in April and May of 23.6% and 23.4% representing effectively our high watermark as we stepped into the pandemic. And then winnowing down slowly, down slowly, I guess, is the catch phrase, but still stubbornly high relative to pre-pandemic levels.

Q4 forecast is coming in at about 13.5%, 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, attributed 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 on -- I'm sorry, unemployment on Page 5. Here you see the forecast as of 12/11 has been bumped up modestly. And again, that really is speaking to 2 things: One, an 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. What's probably not as embedded in this forecast after talking with the UHERO folks is the amount of stimulus that is now looking, what I would call, possible.

And so 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. You see in 2020, in the dark blue, the forecast is down 10%. It's actually a slight improvement from the 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 across where we ended up in 2021 and then a bounce back in 2022. On the brighter side, personal income levels, actually, somewhat ironically, but 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 our system. Certainly, Hawaii as a beneficiary of about $10 billion enjoyed that surplus as well.

A bit of a dip in 2021 as 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 upside there. But basically, the call is for personal income levels to get back to 2019 levels.

I'll 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% for single-family homes, 2.4% for condominiums. December on December numbers are even stronger at 6.1% and 6.9%, respectively. And inventory conditions continue to be very tight. So days on market for single-family is 14 days. 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 get to the infection. As I think most of you know, we launched our Safe Travels program. That has been after a few fits and starts and snafus. I think a 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 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% of prior year and likely to wind out at that level, short of the pandemic cooling itself or 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. 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 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 a little snapshot on the local marketplace. Now, let me turn it over to Dean, who will give you some of the financial highlights. Dean?

Thank you, Peter. Net income for the full year of 2020 was $153.8 million or $3.86 per share. Net income for the fourth quarter was $42.3 million or $1.06 per share.

Net interest income for 2020 on a reported basis was $496.3 million, 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 onetime reduction of $3 million 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 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 was -- from the prior quarter was driven by strong mortgage banking income and 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 leveraged lease. Adjusting 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. Although 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 2020 was $373.8 million, a decrease of 1.4% 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 both branches and the reduction of cash-only ATMs and $800,000 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 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 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, 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%. The lower effective tax rate included a $1.6 million return to provision adjustment. Currently, we expect the effective tax rate for 2021 to be approximately 22%.

Our loan portfolio increased $146 million or 1.2% linked quarter and $949 million or 8.6% year-over-year. Growth was driven by strong commercial and mortgage production. PPP loan payoff and waivers were $16 million for the quarter. Our strong deposit growth continued in the fourth quarter, which increased by $473 million or 2.7% linked quarter and $2.4 billion or 15.4% year-over-year. During the quarter, core 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. 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%. Our net interest margin in the fourth quarter was 2.48%. Adjusting for the onetime $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, the lower interest rate environment as well as strong liquidity levels, partially being offset by growth in loans and investments. In 2021, we expect the margin will decline 3 to 4 basis points per quarter, stabilize in the fourth quarter at approximately 2.4% to 2.45%. These estimates exclude the impact of PPP loan prepayments and from the new PPP loan program.

We maintained our strong risk-based capital levels, and our CET1 ratio ended the year at 12.06%. During the fourth quarter, we paid out $26.9 million or 63% of net income in dividends. Our share repurchase program remains suspended. And finally, our Board declared a dividend of $0.67 per share for the 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 $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 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 6 months for our customers, given the degree to which Hawaii was impacted by COVID, the provisions afforded under the CARES 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% of total loans. 86% of the loans remaining as 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% of the loans -- of the commercial loans, excuse me, that are on deferral continue to pay interest.

Credit metrics remain 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.

Nonperforming assets totaled $18.5 million or 15 basis points at period end, flat for the linked quarter and down $1.6 million or 3 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 increase, bringing the total allowance to $216.3 million and the ratio of the allowance to total loans to 1.8% or 1.89% net of PPP balances.

The increase this quarter reflects the company's credit risk profile and the current economic outlook and forecast 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 just a little bit of discussion around how we see 2021 shaping up and the macro environment and what we intend to -- 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, and despite even what's happened at the end of the year, a reasonably accommodative monetary environment. So we see top end -- our 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 will 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. 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 getting 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 consumer preference and behavior. 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 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 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, extraordinary liquidity position as we stand right now, customer outreach. I was really proud of how our bankers were able to connect and keep tabs on our customers straight through 2020. Hopefully, things get a little bit easier in 2021. 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 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, 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 interesting movements in slides I'll share with you in a few moments that really just, I think, really highlight and exemplify that. So from our standpoint, we've been able to grow market share for a number of years now. In 2021, despite the challenges of the year, we see no reason not to think that, that trend will just continue on.

So on to the consumer -- 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, call it, 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 the end of '21, maybe into the fourth quarter of '21 or beyond.

So it's very reasonable to assume that this period of behavioral forced -- somewhat forced behavioral change could end up being an 18 to 24-month period. That's awfully long. I'm not sure what level of rebehavior snaps back. And I think that snapback really is dependent on whether or not consumers find that their changed behavior to be an enhancement or an 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 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, what the pandemic has represented is just an exceptional acceleration of that trend and one that, obviously, I think we, as an industry, need to be prepared for.

So the next 4 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 in-person branch transactions, which had been incredibly stable for an awful long time, kind of winnowing down gently over the past several years, but we get to March of 2020, really the onfall of the pandemic, and our branch transactions dropped to -- 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 to the new normal, probably to a certain extent, but probably not nearly to 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 were digital-only customers, 17% branch-only customers. Fast forward a year, and that number on the digital-only front accelerated to 31% and the branch only side fallen to 11%. So a pretty meaningful move in the span of 1 year.

When you look at deposits, half of our branch transactions are depository in nature. And really thought we had gotten awfully digital in the past 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, 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 Zelle products. So we are a Zelle Bank. It seems to be a great product working for us and has -- we thought, had good consumer adoption. So we went in place June of 2019. You see a pretty nice rise here. 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, Zelle transactions had almost doubled. So really a phenomenal outcome there.

So I guess to sum it up, 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 be not just a traditional physical bricks-and-mortar organization, but a pretty darn good digital organization as well. That takes money, I think, as everyone on this 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 of Bank of Hawaii. We view it strategically, and we are long-term oriented in how we roll out many of these programs. It's internally driven in that, obviously, you need new skill sets to really drive and lean into this process. 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 good outcome for us.

And finally, this stuff is, I think we've got the bulk of our spend in the bag at this point, but it's never ending, and there will always be opportunities to spend more, and we intend to do that.

On Page 29, you see a 5-year snapshot of our expense line. So 2015, spent $348 million in noninterest expense. Fast forward 5 years to this past year, we spent $374 million, that's a 1.4% CAGR against the Honolulu inflation rate of 1.9%. So we feel generally pretty good about that. We're able to bring overall headcount down by about 7% over that same period.

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 million 2020 run rate is about $40 million in innovation expense that wasn't there previously, if you go back 5 years. I mean, we go back to 2015, we were putting really kind of a hobby level of a couple of million dollars a year 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 important but somewhat mundane things like router refresh or server refresh or a WiFi refresh or desktop refresh, all of these things that you have to do over and above just having a core capability in place. And then obviously, we've spilled into, in a meaningful way, into the digital environment and the digital marketing, data analytics, CX or customer experience as well as operating efficiencies.

I mentioned that our FTE count was down 7% over that 5-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 new initiatives.

On the next page, you see SimpliFi Arena. So SimpliFi, some of you know, probably not all of you, is our digital sub-brand. So basically, we use SimpliFi really to help highlight the digital 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% name recognition already. So the marketing team has 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 Sheriff Center. The Stan Sheriff Center is the main and most prominent arena sports venue in the state, in some ways, the crown jewel attendance venue, exceeding 10,000 people. And we renamed it, instead of renaming it Bank of Hawaii Arena, which I don't think would have gotten us a lot, given the breadth of our brand name, we named it SimpliFi Arena by Bank of Hawaii. And really, the intent there is just to continue to proliferate the digital concept within the Bank of Hawaii brand.

So to finish off here, 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 some time in the next couple of months. We also, with a separate retailer, are sunsetting about 50 cash dispensing ATMs, as ATM volumes have fallen. ATM volumes have fallen about 20% in the past year. And obviously, what you saw with the Zelle trends, people are finding ways to transact money differently. These activities, as you saw, are embedded in our fourth quarter numbers, $6.1 million in onetime costs, but the benefits are $5.1 million 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 has 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 help make that even more possible for them and something that we are not using wholesale through the organization, but will probably increasingly use in pockets of the organization.

So just to close with some thoughts on our own Bank of Hawaii competitive edge in building, innovation and building towards the digital future. Obviously, we've got a strong market position. We have a nonacquisitive 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 string in lots of our IT areas. We're a single market footprint, which allows us to focus. Management has 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 push through how to build out a lot of these newfangled projects and concepts, 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 Cindy Wyrick. This will be Cindy's last earnings call with us. Cindy has been with Bank of Hawaii for 19 years. So she is stepping into a very well-deserved retirement. And Cindy came to us from legacy BofA back at the turn of the century and has been, I think, as you all know, just a consummate professional. And she turns the reins over to Janelle Higa. Janelle is 7 years with Bank of Hawaii. She is 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.

(Operator Instructions) Our first question comes from the line of Jeff Rulis with D.A. Davidson.

I thought the -- appreciate the -- I thought the consumer digital adoption slides were interesting, so appreciate that. Switching gears, on the -- 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 UHERO sort of projections, maybe a little more customized to the local market. But I don't know, Peter or Mary, if you want to touch on kind of where you think you are relative to the kind of national macro trends?

Yes. Well, Jeff, let me start and Mary can clean up whatever mess I create here. But I think it's clear and it's well documented that Hawaii is lagging the rest of the country a bit by unemployment and near term, I think, recovery prospects. It's just going to take us a bit to spool up here. So I think that plays a bit into our provisioning and, therefore, reserve holds. I think it's important to note the trajectory of our provisioning.

So we're down pretty smartly from the prior quarter. Still $15.5 million -- or $15 million is a good amount of change. But as we look forward, I think there's the potential, and there's the opportunity for that continuation of trajectory, if you will, barring any other crazy unforeseen things happening. And that's the way I would recommend looking at it, as we see it. Mary, anything?

The only thing I'd add is, we've really been focused on 2 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, in really ensuring that we're prepared for any downside risk, and that's been our approach.

Okay. And my other question was on, I just wanted to make sure the cost savings from that branch consolidation, the most recent round, was included in the guidance for, I think Dean said, flat to up 1%?

Yes. It is, Jeff. And just to kind of show you how that breaks out. About half of that savings is FTE savings. A portion, a small portion of that has already been achieved because, obviously, as the branches are prepared for this action, they've taken their own hiring approaches. But the majority of that savings, you're right, will flow into 2021.

Okay. And I guess it's -- this is where it blurs the line a 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, in your statement that it's kind of never ending. I guess, in the very short run, a near-term additional tranche of branches, is that on the docket? Or it's sort of an evolving, this is a chunk here, and then you'll digest that and maybe revisit.

Yes, probably more on the evolving side. So we will -- with these closures, Jeff, we'll be down to 50 branches and more -- probably more meaningful for your analysis is, if you go from 2014 to today, our branch footprint is down about 26% by square footage from -- back then, it was 312,000.

So we are approaching, I think, where we would be comfortable branch square footage wise. I think there's still obviously opportunities to bring that down. I think the other good outcome here is that when we look at our kind of the branches that we have in place now, about 60% of them have been highly renovated.

So from a brand standpoint, they're completely up to spec. That remaining 40% is -- a lot of them are smaller, much smaller branches, a 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'll continue to kind of zig and zag and jigsaw that opportunity and likely down. But a lot of that good work has been done already.

Great. Okay. That's it for me. And Cindy, congrats on the retirement, best of luck and welcome, Janelle.

Thank you, Jeff.

Our next question comes from the line of Ebrahim Poonawala with Bank of America Securities.

I guess 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, 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 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 earnings cycle, would you be doing more in terms of -- on the digital front, be it in terms of revenue growth, client acquisitions?

No -- well, it's a good question, and it is the right question. I can't think 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 opposite way, Ebrahim.

And 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 to date, we've been fortunate. I'll tell you one thing that I feel good about. So to answer your question, no, 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 upwards of half of that $40 million was spent really getting the core IT infrastructure into place.

And so that's obviously software cost, that's depreciation and that's hiring people. We've hired a ton of IT and data folks and the like, just to kind of get that infrastructure in place. And that's largely done. That gives us some level of scalability as we move forward. Another important element is getting senior leaders in areas like digital marketing and data analytics and things like that in place. Those are challenging assets to find and to make sure work with the organization, we feel great about that. And 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, frankly, when you look at, a little scary, isn't it?

Got it. Understood. And I guess, just following up. Dean, I wanted to just better understand the margin outlook. I believe last quarter, you had a guidance of 67 basis points compression. When I look at the 2.54% versus the 2.67%, it was 13 basis points. Just talk to us in terms of how much of that excess compression was liquidity driven and just your expectations around the excess liquidity or the cash balances that you expect to carry as the year moves out?

Yes. The additional liquidity was about 3 to 4 basis points. So when you adjust for that, it was -- we would have been down maybe 1 basis point or 2 more than what I had guided to. We expect to deploy as much cash as prudent. We're still putting money into the investment portfolio. 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 somewhere in the 4% range, but that includes some maybe stimulus money that we expect to receive. But we still have a lot of liquidity on the balance sheet.

Got it. And just separately, in terms of loan growth, I mean, obviously, 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?

Yes. So I think -- so we got 3.8% loan growth in 2020, net of the PPP, which I thought, given the insanity of the year, was a pretty good mark. A lot of that came from our commercial mortgage team. Construction ramped up. And the great thing about the construction side is those are effectively essential projects that happened 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. Indirect has been amazingly durable. And we're only playing at the very top end of that market. Potentially, that comes together positively in '21.

So I think, Ebrahim, only the other consumer, which is installment for us, I think, we probably can see a bleed there, which is not surprising nor, 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 it's kind of on the cusp of achievable, all things dependent on what happens with the virus outcome, right?

Right. All right. No, that was good color, Peter. And Cindy, congratulations. Enjoy your retirement, we'll miss talking to you.

Thank you.

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

I just want to touch on the noninterest income guidance. Curious, like, what is that assuming for mortgage banking revenue. I think it's safe to project that it will be less this year than last year, but what does that assume for gain on sale?

So a couple of things. So yes, we did have a pretty extraordinary quarter, fourth quarter. The gain on sale was pretty wide, it was over 4%. What we're seeing recently is it's coming down to below 4%. And then we built in a little bit of maybe conservatism based on volumes that if interest rates were to rise, we could see a drop-off there. So it would be somewhat lower throughout the year is what we have forecasted in that number.

Got it. Okay. That's helpful. You've covered most of my other questions, but the only other one is on modeling the tax rate. I was kind of surprised to hear it near 23%. Is there anything in that causing it to rise from where it's been the last couple of years?

The guidance was 22%.

Oh, 22%?

Yes. A couple of things there. One is that we expect income to be a little bit higher this year. So that kind of pushes the effective tax rate higher. The other thing was there's some expiration of some grandfathered reductions that expired in 2020. So in 2021, we won't have that.

(Operator Instructions) Our next question comes from the line of Jackie Bohlen with KBW.

I wanted to talk about the margin a little bit more. And just, Dean, when you think about your forward contraction, how draconian 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 levels 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 to take the liability side, we are kind of coming to the, 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, mainly in the residential mortgage and investment portfolio that still hope will have some decrease in yields. Kind of offsetting that or stabilizing that would be some of our floating rate loans that already are -- 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 repricing of the fixed rate assets. And that's how we got to the guidance.

Okay. Great. That's very helpful. And I mean, I'm assuming that thoughts on loan growth and then the deposits that were discussed on the call are also included in that outlook of balance sheet mix?

Yes.

Okay. Great. Everything else I have is already answered, but I just -- I too want to echo thank you for all of the wonderful data in the back of the slide deck, just related to digital adoptions and everything else. It's really helpful. And Cindy, we're going to miss you.

Thank you, Jackie.

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

And Cindy, I just want to say it's been absolutely lovely working with you, and Janelle, welcome. I just wanted to go back to Andrew's question because I think I had a wrong number written on my notes. So the forecast in terms of tax rate for next year is 22%. Is that correct?

Yes, 22%.

Great. Okay. And then in terms of PPP fees that remain of your $528 million, how much remains 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 -- out of the $16 million that paid down and were waived, about $370,000 in fees were accelerated.

$373,000. So -- I mean, so how much in total fees were taken into net interest income this quarter?

That $300,000.

Just $300,000. Okay. Okay. Got it. For some reason, I was thinking that was higher. Okay. That's helpful. And then Mary, I appreciate the further update on deferrals as of January 21, the $428 million. Do you have a breakdown in terms of what is just very high level C&I, CRE and maybe consumer?

Yes, I do. One second here. So in terms of the deferrals, for the commercial, that's $312 million; $240 million is commercial mortgage, $63 million C&I, $8 million leasing. In terms of the consumer, $126 million in residential. And this, I'm sorry, Laurie, is actually as of the 12/31 number, and I can get it for you for the 1/23 number.

You know what, I've got the 12/31 breakdown.

Okay. Hang on. Maybe -- I do have the 1/23.

Yes. No, I just wondered because you had updated all your deferrals totaled $490 million as of December 31. And then I thought I heard you right that you gave out a $428 million number as of January 21.

Yes. I'm sorry. So let me give you that breakdown. So commercial is $299 million and consumer $129 million. 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 21.7%, auto 12.9%, and other consumer, which is our unsecured product, of $4.7 million.

Okay. Perfect. That's super helpful. Okay. Great. And then I guess, Peter, last question to you. 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.

Yes. So I think your last thought probably highlighted it. And there's just a lot of unknowns. So the idea of raising the dividend, that's a space where we try to be as conservative as possible in making those decisions as in we only wish to make one way decisions there, which are increases. So I think we're going to be a little conservative around dividend increases at this point, Laurie.

And then secondly, on the buyback side, that's, as you know, much more of a tactical operation for us as conditions warrant. And again, I'm just not -- 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 will begin to have those discussions internally with our directors as a lever. So I guess what I'm saying is, neither are probably on the table near-term '21, but look to see what happens latter '21 condition wise. And I hope we can have those conversations.

I'm showing 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.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.