First Hawaiian Inc (FHB) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the First Hawaiian, Inc. Q4 2020 Earnings Conference Call. (Operator Instructions)

Please be advised that today's call is being recorded. (Operator Instructions) I would now like to hand the call over to Kevin Haseyama. Please go ahead.

Thank you, Michelle, and thank you, everyone, for joining us as we review our financial results for the fourth quarter of 2020. With me today are Bob Harrison, Chairman, President and CEO; Ravi Mallela, CFO; and Ralph Mesick, Chief Risk Officer. We have prepared a slide presentation that we'll refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.com in the Investor Relations section.

During today's call, we will be making forward-looking statements. So please refer to Slide 1 for our safe harbor statement.

We will also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measurements to the most directly comparable GAAP measurements.

And now I'll turn the call over to Bob.

Good morning. Thank you for joining us today. I'll start by giving a quick update on the current situation in Hawaii. We have seen an increase in COVID cases following the holidays, but the magnitude of the increase is nowhere near what is being experienced on mainland and appears to be tapering off as we get farther from the holidays. As of yesterday, the statewide 7-day average of new cases was 111 and the corresponding positivity rate was 2.5%. And thankfully, hospital capacity on all the islands remains good. Vaccine distribution has started statewide, and this week, the first mass vaccination site was opened on Oahu.

Regarding the visitor industry, the pretravel testing program for trans-specific passengers is still in place. We saw an increase in vacation arrivals in the second half of December and since then, vacation arrivals have fallen back to pre-holiday levels of about 4,000 people per day. It's likely that arrivals from the West Coast, our largest market, are being negatively impacted by the recent surge in cases there. The economy is showing signs of gradual improvement as the November state employment rate improved to 10.1% and the housing market remains strong.

The housing market on Oahu ended 2020 on a strong note. The median single-family home price in December was $870,000, 6% higher than the prior year, and there were about 36% more transactions than the previous December. For the full year of 2020, Oahu a single-family median home price was $830,000, up 5%, and the number of sales was up 2.3%.

Turning to Slide 2. We finished the year with a solid quarter. Diluted earnings per share was $0.47, and the Board maintained the dividend at $0.26 per share, a 55% dividend payout ratio. Fourth quarter pretax pre-provision net revenue increased 10.3% over the third quarter to $100.7 million, both net interest income and noninterest income increased while expenses fell. Deposits grew by $330 million, driven by growth in consumer and commercial deposits, partially offset by a reduction in public deposits. The improved deposit mix helped to reduce our total cost of deposits by 2 basis points to 11 basis points. That contributed to a 1 basis point increase in our net interest margin.

Now I'll turn it over to Ralph to go over asset quality.

Thank you, Bob. If I could turn your attention to Slide 3, I'll make a few comments on credit. Asset quality continues to hold up, and we entered the year well positioned. In Q4, realized credit costs remained low, we made an incremental provision of $20 million at year-end to build our reserve for future loan losses. The provision addressed some near-term uncertainties we see ahead of the rebound expected in the last half of the year. Net charge-offs for the quarter were $1.42 million compared to a slight recovery in the prior quarter.

The net charge-off ratio was -- for the year was 23 basis points to total loans, up 19 basis points from 2019. Adjusting for the gain on the held-for-sale loans liquidated at the start of the quarter, the rate would have been just 18 basis points in 2020. NPAs and 90-day loans were down again in the fourth quarter. As a percentage of total loans, the rate decreased 6 basis points from the prior quarter to 15 basis points at December 31. On a year-over-year basis, the ratio increased by 1 basis point.

Criticized assets continued to decline as well, dropping from 4.58% of total loans at September 30, 2020 to 4.23% at year-end. The anticipated increase in past due loans has not yet materialized. Loans 30- to 89-days past due to total loans rose 4 basis points to 30 basis points at the end of Q4. This is 5 basis points lower than the number reported at December 31, 2019.

Moving to Slide 4. You see a roll forward of the allowance for the quarter by disclosure segments. The reserve increased by about $12.6 million to $208.5 million, which is 1.57% of total loans and 1.67% net of PPP loans. The build this quarter was judgment based. Our outlook for the recovery in the second half of the year is unchanged, but we added loan loss reserves this quarter to cover potential near-term uncertainties.

At year-end, we saw increasing infection rates across the country, most notably on the West Coast, which is a major tourism market for the state. At the same time, we noted a slow rollout of the vaccinations and possible delays in fiscal supports with the transition to a new administration and Congress. We believe these factors could result in incremental stress within the commercial book.

Our qualitative overlay supports default expectations not embedded in our loss models. With the add, this now is about 28% of the reserve at quarter end. The bulk of the overlay is attributed to COVID.

Turning to Slide 5. We see the composition of our commercial portfolio by risk rating as of the quarter end. We remain focused on strategies to manage at-risk credits to support specific retention, rehabilitation and exit objectives.

As mentioned earlier, the level of criticized assets continued to decline in the fourth quarter. Since the peak reported at the end of Q2, we have seen a decrease of about $181 million in criticized loans or about 117 basis points of total commercial loans. The reduction has come on a combination of loan sales, repayments, refinancings and upgrades.

On Slide 6, you see an update of outstanding loans that had received deferrals at the start of the pandemic. Reperformance continues to be strong and the delinquency rate is low. About 83% of the loans by balance have completed their deferral period. Around 91% of the borrowers have returned to payment and a small portion have been offered a second deferral based on additional considerations.

Commercial loans seeking additional modifications increased from $56 million to $79 million. Consumer loans seeking additional modifications increased from $25 million to $121 million, with the bulk of the increase related to residential mortgages. Most of the loans still on first deferral are residential mortgages. As we have mentioned before, these loans that went on deferral were well collateralized with about 97% of the balances showing an LTV under 80%.

With that, let me turn the presentation over to Ravi, who will provide more details on our financial results this quarter.

Thank you, Ralph. Turning to Slide 7. Period-end loans and leases were $13.3 billion, down $221 million or 1.6% versus the prior quarter. Residential mortgage loan balances grew $21 million due to strong refinancing and purchase activity. Growth in residential balances was offset by loan sales in the fourth quarter.

Consumer loans continue to pay down and demand for new consumer loans remained low. Construction projects continue to draw on their lines and balances grew $73 million. C&I balances declined, driven by a $73 million decrease in shared national credits, $119 million of PPP loans that were forgiven or paid down in the quarter, and was offset by a $77 million increase in dealer flooring balances. Excluding the impact of PPP loan forgiveness, C&I loans declined by about $32 million.

This week, we started taking applications for the second round of PPP loans. As of the end of January 20, we have received 1,781 applications. Excluding the impact of PPP loans, we expect loan growth in 2021 to be in the low single-digit range, and we expect demand to pick up in the second half of the year.

Turning to Slide 8. Total deposit balances ended the quarter at $19.2 billion, a $300 million increase versus the prior quarter. This increase was driven by a $442 million increase in consumer and commercial deposit balances, partially offset by $112 million decrease in public deposits. Public time deposits declined by about $204 million. Our cost of deposits fell 2 basis points to 11 basis points in the quarter.

Turning to Slide 9. Net interest income was $135.2 million, a $1.2 million increase versus the prior quarter. The increase was primarily due to $1.5 million in lower interest expense. Net interest margin was 2.17%, a 1 basis point increase from the previous quarter.

The margin was helped by PPP loan fees, lower deposit costs, higher investment yields, partially offset by lower loan yields. The amortization of PPP fees contributed about 2 basis points to the margin in the quarter. The investment portfolio book value adjustment in the quarter was not material and didn't impact the margin. We expect the margin, excluding PPP loan forgiveness, to decline in the first quarter by 5 to 8 basis points, driven by lower loan yields, lower security yields and partially offset by lower funding costs.

Turning to Slide 10. Noninterest income was $53.6 million, $4.7 million higher than the prior quarter. The increase in noninterest income in the fourth quarter was driven by higher levels of customer activity and onetime items in the other income line. The significant one time items include the sale of a commercial loan which generated a 4.2 -- $7.2 million recovery. The settlement of tax returns related to the separation from BNPP, which increased other income by $1.2 million and a $4.8 million charge on the funding swap for the Visa B shares sold in 2016. Excluding these items, noninterest income would have been $50 million. Noninterest expenses were $88.1 million, $3.5 million lower than the previous quarter, and the efficiency ratio was 46.6%.

Turning to Slide 11. In 2020, expenses came in well below our original outlook of about 6% growth over core 2019 expenses. This was driven by a combination of pandemic-related factors. Compensation expenses were lower than expected as headcount was held relatively flat throughout the year. Production-related compensation expenses were also lower and higher-than-projected residential mortgage originations led to higher deferred loan origination costs. Transactional activity related expenses, such as card rewards were well below normal levels in 2020 due to declines in customer activity.

In 2021, we will continue to diligently manage our costs. But we anticipate that expenses will be about 7% higher than the unusually low 2020 levels as activity begins to normalize and we continue our technology investments. First, inflation-related increases, such as health care costs and other embedded contractual increases will add about 1% to 2%.

We also expect to return to higher levels of customer activity in 2021. For example, we will see production-level compensation -- production-driven compensation levels and card reward expenses increased this year. Relative to 2020, this normalization of activity levels is expected to add about 2% to expenses.

Finally, we remain committed to our investment in technology. We are in the middle of a core system conversion and continue to respond to accelerated digital adoption within our customer base. These investments in technology and the core replacement project will add another 3% to 4% to expenses. 2021, we're committed to investing in the business, and at the same time, we're looking for opportunities to gain efficiencies in other areas and reduce expenses.

Now I'll turn the call back over to Bob.

Thank you, Ravi. Wrapping up, 2020 was a challenging year for Hawaii and our bank. And I'm very proud of the way everyone in the organization came together and responded. 2021 will be another challenging year as we continue to navigate the pandemic and its economic and social impacts, but we remain very optimistic that things will improve, especially in the back half of the year.

The COVID situation in Hawaii has stabilized at a controllable level. The vaccine rollout is underway. And we've seen the unemployment rate drop by over 50% from its peak. As Ravi mentioned, we also have a number of technology initiatives going on in 2021. We are in the middle of our core conversion, which we expect to go live in the second half of the year, and we also have several other technology projects underway that are set to go live during the year. We have a lot ahead of us, but our ability to be agile and innovative will continue to enable us to serve our customers in the community.

Now we'd be happy to take your questions.

(Operator Instructions)

Our first question comes from Steven Alexopoulos of JPMorgan.

I wanted to start -- so Bob, in the mainland U.S., many banks are talking about optimism levels building amongst business customers. What are you seeing in Hawaii? And is that translating into stronger pipelines at all?

Yes. I think we might be a little bit behind the mainland in that. We're seeing people talking about it. But as we talked about on the return to tourism, while it popped up over the holidays as it typically does, it has settled back down at about 4,000 people a day. And so we really haven't seen the build yet, and we expect to see that really this quarter and next quarter, hopefully, as the virus gets more under control on the West Coast and people get more comfortable here.

We have seen a strong return to employment, though, and that has certainly helped our activity numbers that Ravi mentioned, whether that's credit and debit card spend or merchant processing, service charges. So all of those have increased relative to earlier in 2020, but they aren't back to 2019 levels yet.

Okay, okay. That's helpful color. And then on the allowance, given how strong credit quality was in the quarter, particularly risk rating migration, I was surprised by the $20 million provision, right, most of which went to bolster the reserve. Could you give more color, maybe for Ralph, on why you needed to increase the reserve this quarter?

Yes, Steve, I think at the end of the year, as we were looking at what was happening, we kind of looked at what the infection rates were on the U.S. mainland, in particular, California, we had some concern there. We did note the vaccinations were coming out, but we were unsure of how quickly that rollout would occur.

And then I guess the last thing is just really trying to understand how the administration, how successful they would be in terms of getting some of the programs up, PPP ramped up and what would come out of Washington in terms of support for people on unemployment. So I think all those things, we sort of said, well, we thought there'd be some near-term stress perhaps in the portfolio. And we put, really basically, just a judgmental add against the commercial book, not a large add, but I think where we stand out with about -- I think over the course of the year, about $138 million in reserve build, we feel we're in a pretty good spot right now.

Okay. That's good color. And then final question on PPP 2.0. When you look at the pipeline there, do you think it could be enough to offset the runoff of round one? Or do you think net PPP balances fall through the year?

Yes, Steve, that's an excellent question. That's really hard to predict. As we saw with PPP 1, a lot of activity at the beginning. It's running about, again, only 2 days, so not a whole lot of information is running about 1 to 3 and 3 being the people that already had a PPP loan, applying for a second one and then the 1 being the new borrowers, so about 25% and 75%. It's just really hard to predict if that's going to continue and at what level.

Our next question comes from Ebrahim Poonawala of Bank of America.

I guess if you could start with the margin one, Ravi. If you could just remind us -- I guess, your guidance for 5 to 8 basis points compression excludes any PPP fee. Just remind us in terms of what's remaining in PPP fees? And do you expect majority of the first round loans to get forgiven in the first quarter? And if you could add to that in terms of just your outlook for the core margin beyond the first quarter ex-incoming new PPP loans? Just what are the drivers of the -- that the margin stabilizes or moves up or down beyond 1Q?

Sure. I can take that, EB. Just maybe a clarification on -- in Q4, the margin in Q4 was 2.71%. And I think as we look forward with respect to the margin, the big drivers for Q1, and as you know, Ebrahim, we only give guidance 1 quarter in advance. In particular, we see the drivers ex-PPP as -- in Q4, we saw the loan yields fall about 4 basis points. I think we expect a similar impact in Q1.

From a securities yield standpoint, we see that being relatively flat to down. I think in -- cash levels, I think, is sort of an unknown and certainly, we've seen average cash levels go down quarter-over-quarter, but end-of-period balances were up, and that's going to put some pressure on margin, maybe 1 or 2 basis points.

And deposits, in particular, I think, were down 2 basis points and down to 11 basis points, but just -- there's less room to go down over time. Maybe moving to PPP loans and just talking a little bit about that, in particular, we had about, I think we mentioned about $119 million of PPP loans paying down. That contributed about 2 basis points to margin, and it's about $1.5 million in fees collected.

I think about $400 million in PPP loans are in the process of being forgiven. And so we should see that roll through over the course of a quarter or 2, and you can extrapolate the $1.5 million on $120 million of balances to the -- to about roughly half rolling off in the next quarter or 2 and corresponding fees and impact to the margin over time.

Got it. And then just in terms of going back to the credit and provisioning outlook. My sense is we're not going to see a significant change in visitor arrivals by the time -- at least through the end of the first quarter, if not into the middle part of the year. Ralph, just talk to us in terms of, should we expect continued modest reserve build until you get to better visibility on those? Or just -- like I'm just wondering from the outside, like is it better logistics on the vaccine distribution and this COVID cases coming down that's going to be enough for you to not build reserves anymore? Or do we continue to see a reserve build up until you actually see on the ground activity pick up in terms of visitor arrivals, et cetera?

It's really hard to predict what we're going to do with reserves. I mean, I think we do look at it every quarter in terms of -- actually month-to-month, in terms of what's happening. We haven't really changed our outlook for the recovery. We think we're going to see one in the second half of the year. So if that were to change, I think that would be a factor. We anticipate, hopefully, holding our level of criticized assets at -- around where they're at today. And if that holds as well, that's a good sign. And we do anticipate that we will see some deterioration in terms of payment rates.

So we'll have to sort of see how all those things flow in before we actually make a call on that. But it's really hard to say right now.

And then the only thing I would add to that, EB, this is Bob, is that after quarter end, seeing that the way the politics moved and the administration has, both the house and the Senate, the prospect of additional stimulus money to support the economy and hopefully, more organized rollout of the vaccine. We'll just have to see how that plays out. But if it plays out well, those could be nice positives.

Got it. And if I could just sneak one more in. The 7% expense guide, Ravi, that you gave, is there any -- I'm assuming that it already reflects any cost savings actions that you plan for the year. And is there any component that's tied to sort of, if loan growth or revenue growth fall short of expectations, you have some leverage to bring down that 7% rate?

No, I would just say we're always looking at opportunities to manage expenses. I think we've had a pretty long and consistent history of doing a good job there. I think if we see activity levels pick up, as we mentioned, hopefully, demand will pick up by the second half of the year. We'll see economic activity and corresponding growth in noninterest income, which will drive expenses on the other side, either compensation-related expenses or in the case of card rewards expenses. And so if we see those expenses rise, we're going to see revenue also rise as a result.

Our next question comes from Jared Shaw of Wells Fargo.

Maybe just sticking with the theme of return. Speaking to some people, I think that they really feel that visitor arrivals are going to really return back to where we were in 2019 by the end of the year. But when I look at the UHERO data, it still looks like they're still looking at 2024 to get back to that peak level of, call it, 30,000 to 40,000 visitors.

When you're talking about a recovery in the second half of the year, are you talking about recovery back to a 2019 level of visitors? Or are you talking about more of like a, call it, an 18,000 to 20,000 visitor arrival and that being enough to sort of take most of the strain off of the system in the near term?

Jared, this is Bob. Maybe I'll start and hand it off to Ralph. We really are looking at the same UHERO projections that I believe you are. And certainly, no expectation that it will return to the 30,000 visitors a day by the end of 2021. So we see, in the back half of the year, much more of a build, it is the virus is under control and activity starts to return.

Anecdotally and just I think all the surveys that HTA is doing, there is a lot of pent-up demand for Hawaii. But that's going to be much more in the back half of the year. But I don't see a return to 2021 levels -- I mean, 2019 levels this year. Ralph?

Yes. No, our outlook has been for the last, I'd say, 3 quarters, very consistent with UHERO. So it's going to be a slow recovery. But as I said, we're anticipating with the vaccinations that we'll start to see that recovery happening in the second half of the year.

Okay. And then as we look at that, I guess, slower level of recovery, how dependent upon additional stimulus is the state to sort of bridge that gap? And then you've done a great job of actually not having any real losses. Should we expect to see actual loss content materialize in 2021?

I mean as I said, we put away in the last year, about $138 million, and we're prepared for losses. Right now, as we look at the portfolio, look at our larger exposures, our customers seem to be very well positioned to deal with stress. Where it's less visible is really, I would say, in the smaller businesses and maybe some of the landlords to those smaller businesses, how they sort of fare through this. So I think we're well positioned where we're at right now. I think we've tried to be very realistic about what could happen. But a lot of this is sort of outside of our ability to really forecast.

And more specifically, Jared, to your point on stimulus money, that certainly helps individuals and consumers. And I think we're seeing that nationally that the delinquencies and charge-off rates for consumers is lower than expected, and that's certainly been our experience to date. So it's definitely making a difference.

Okay. And then just maybe if I can squeeze one more and just finally, like, how do you look at your capital levels here? You've clearly been still growing capital, your capital is strong. Any desire to do anything more meaningfully in terms of capital management here or just until we get out from -- or get through this tunnel where you're happy to continue to build capital?

No, it's something we're very focused on the ordinary dividend that we announced, but also at some point, returning to a share repurchase program. That's a key component of our long-term capital return strategy. Our goals haven't changed, as we talked about at 12% common equity Tier 1. We ended the quarter at 12.47%, so clearly, well in excess of that. And as we see the economy start to recover and maybe some improvement in the West Coast, as we talked about earlier, some of our markets, more stimulus money, those are all things that we're going to look to as we decide when to consider restarting a share repurchase program. But it's something we're very focused on, and we hope to be able to return to that soon to supplement the ordinary dividends.

Our next question comes from Jackie Bohlen of KBW.

I wanted to start off on Steve -- noninterest income. Ravi, you touched on this a little bit with some of the offset that we could see to expenses. And I'm looking particularly at the 2% that you guided to in terms of higher production, customer activity and all that. I think if I wrote it down correctly, you quoted roughly around $50 million, excluding onetime costs as the run rate for the current quarter. Just wondering, is that a good starting base heading into '21 and as activity picks up, where you might see that go from there?

Yes. Jackie, I think the $50 million number, I think, has been within $1 million or $2 million every quarter, it has been a pretty steady place, where we've been. I think I think that comes from a diversity of sources of fee revenue that we have on the noninterest income line. Certainly, if we start to see activity levels pick up, you'll see some of those lines also benefit from them, starting with service charges. We saw a pretty good stabilization in Q4. That's driven really by activity levels.

Credit card and debit card was up quarter-over-quarter, about $1.6 million, and we saw certainly good growth on interchange fees and also in merchant services in the quarter. And so as activity picks up, we could see some good growth there. And that will obviously also have an impact on card rewards expenses. But certainly, those lines are poised to grow over time as we start to see more activity locally.

And I think, as Bob has mentioned in the past, our trust and investment services income has been extremely solid with pretty good growth and diversification of revenue, primarily from recurring revenue, which provides us stability during periods of low economic activity.

And I'd just say there's plenty of opportunity and this diversity of sources of income where, I'd say, if you look back at 2020, in a period of very low economic activity or branches were closed, and we took some actions to support the community like waiving ATM fees, that overall noninterest income has been very solid and stable. And we expect it to be there and actually grow a little bit as economic activity returns in 2021.

Yes, and Jackie, you just add to Rob's comments we're especially proud of our wealth management area. They really went out of their way to connect with customers and talk to them and actually did better than last year. Our assets under administration is now just under $16 billion, $15.9 billion. And they actually, on a fee basis, did better than 2019, which is terrific. And it really was by taking care of their customers.

Okay. That's wonderful color. And in terms of mortgage and swap activity in the quarter, how much of a contributor were each of those?

Yes. The swap activity was relatively good. It sort of picked up at the end of the quarter as we saw rates start to pick up, in particular, the 10-year rate picking up, we saw our customers looking to manage interest rate risk. And so we saw growth of about $900,000 in the quarter. And certainly, as rates sort of move around, that tends to cause our customers to think about the future rate profile, and it tends to drive activity in the swap line. And so to the extent that our customers are interested in hedging interest rate risk, certainly, we have the products and services to be able to serve them.

I think on the mortgage activity, certainly, we had some sales in the quarter, and that contributed about $0.5 million to $1 million in noninterest income fees. And so right now, we see that as an opportunity when we think about the mortgage book, and we think about sources of funding and loan growth, we look at that in totality. And it's a lever we can pull whenever we have the opportunity to.

Okay. So somewhat of a balance sheet management tool as well?

That's correct.

(Operator Instructions)

Our next question comes from Andrew Liesch of Piper Sandler.

I just wanted to circle back on -- the dealer flooring book increased this quarter. How is the optimism there, especially on the mainland? I mean the car manufacturers have obviously been shut down for a while and as they revamp their production, my thinking is that could be a pretty good source of loan growth, maybe sooner than the second half of the year. So what's the tone out of these borrowers?

Andrew, this is Bob. And no, you're on the right track there that clearly, the dealers suffered by not having enough supply in Q4, and we've talked about that early -- well, actually Q3 leading into Q4. And we've talked about that as production was coming back online, we expected balances to increase, which is exactly what happened. Production continues to improve. So there's still an opportunity for some growth.

We ended the third quarter $300 million less than the year prior. I can't remember, Ravi, what the fourth quarter was relative to the year prior. But we're still well under the 2019 levels, essentially the same customer base. So there is a potential for improvement in loan balances as production continues to ramp up.

Our next question comes from Laurie Hunsicker of Compass Point.

If we could circle back here, the remaining net fees on the PPP book as of right now, without obviously adding any new loans, what is that dollar amount?

I don't have that right in front of us.

Yes, it's about $14.5 million.

Yes.

Okay. And then I just want to make sure I heard you right on expenses. So if we're looking at it today, your run rate going forward from today's $88 million is going to be somewhere in the $98 million to $99 million a quarter?

That's about right. Yes. We're ramping up over the period of the year.

Okay. And I mean can you just help clarify what additional you're doing on the expense side that we're going to see that directionally go higher?

Yes, I mean I guess we've kind of talked a little bit about that. We mentioned the inflation-related drivers. That's going to probably do increase by -- increase our expenses by about 1% to 2%. We talked about the activity-based item, either production compensation levels or things like card rewards as activity starts to pick up. I think there's probably about 1% to 2% there.

And then our commitments to technology, we've kind of talked about this for a number of quarters, in particular, our core conversion, which we're in the middle of. And we feel that's going to enable us to be more digital, both from a customer and an internal perspective. And that's going to add to costs from our very, very low 2020 levels. You get another 2% to 4% there, and that's how we got to the 7%, and that's going to ramp up over the course of the year.

And so -- and once that core conversion is complete, does that cost then fall off? In other words, if we look to 2022, directionally, what would you expect on the expense side on a relative basis? And I realize that's further out. I'm just trying to reconcile that we're seeing core costs being cut across the board at regional banks, and you've got a ramp. So do those core conversion costs then fallback?

No. I mean, I think the way we think about it is that we're going to be amortizing those costs as we -- as the system goes into production. So things are going to stay relatively flat. We might see some benefits by putting in a new core from an efficiency standpoint, and we'll start to realize that over time as those efficiencies get built into the business processes that we have in our organization. But we expect those costs tied to core to stay relatively flat looking into 2022.

Yes, and Laurie, this is Bob. Just to add to that. So there's certain things you can't capitalize or amortize. And so that goes into the 2021 number. But on a run rate basis, we're not expecting a huge difference from the current core technology and the new one, even though we're going to get a dramatically improved product. Really, the investment is coming into other areas of technology, and that's what we're speaking to.

Okay. Okay, great. And then tax rate, how should we think about that going forward?

So the tax rate for the quarter was 23.5%. I think it might tick up or down a little bit depending on where we see, frankly, our projections for net income for 2021. We've got -- a lot of our benefits on the tax line come from our investments in low-income housing tax credits. So if you think of that as an absolute benefit to the tax line or the tax expense line, as income goes up, obviously, our overall tax benefit from a dollar perspective stays about the same and grows a little bit. So our tax line could increase if net income increases.

And Laurie, of course, all of that is assuming no change in corporate taxes coming out of the current administration, and we would obviously have to wait and see what comes in that area before we're able to really dial it in on the number.

Right, right. Okay. And then just last question here on deferral. So your commercial deferrals continue to drop nicely. You're down to $89 million or 1.4%. Do you have a breakdown of what your deferrals are in terms of hotels, retail, auto, being sort of the biggest components and maybe also transportation, food and beverage?

Yes. If you look at the slide, you'll see that there's not really a big amount that is in the commercial book so nothing significant there. None of our larger customers would be in that number. So they're holding up pretty well.

So just -- I mean, just even in terms of the hotel, your hotel book, right around $470 million, how much is on deferral there?

We have, I believe, maybe one small credit and that's it.

Our next question is a follow-up from Jackie Bohlen of KBW.

I just wanted to make sure that I'm very clear on the expense guidance, that's on the full year 2020 expenses as a base, not an annualized fourth quarter number. Is that correct?

That's correct, Jackie. Our 2020 expenses for the year were a little bit below $368 million, and that's the base we're running from.

There are no further questions. I'd return the call back over to Kevin Haseyama for any closing remarks.

Thank you, Michelle. We appreciate your interest in First Hawaiian, and please feel free to contact me if you have any additional questions. Thank you again for joining us, and have a good weekend.

Ladies and gentlemen, this does conclude the conference. You may now disconnect. Everyone, have a great day.