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 speakers' presentation, there will be a question-and-answer session. [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 will be referencing a slide presentation as well as the earning release. A copy of the presentation and release are 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 are thinking about 2021 before we take your questions. To begin with though, I’ll say quarter four represented a good quarter. It’s a little bit noisy, but generally we saw a stabilizing economy, a 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 and improving loan deferral population that Mary will touch on. And then finally I think as we step into 2021, roughly we are 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 a high water mark 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 was coming in at about 13.5, which, 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 I’m…

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. Non-interest income for the full year of 2020 was $184.4 million, 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 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 buy-out of the leveraged lease. Adjusting for this one-time item, non-interest income in the fourth quarter of 2020 increased to $1.4 million in the fourth quarter of 2019. Despite the on-going challenges of the pandemic. We expect non-interest income in 2021 to be approximately $42 million to $43 million 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. Non-interest expense for the full year of 2020 was $373.8 million, a decrease of 1.4% compared with $379.2 million in 2019.…

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 customers, given the degree to which Hawaii was impacted by COVID, the provision supported 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, customers loan balances on deferral were down to $428 million or 3.6% of total loans. 86% of the loans remaining at deferrals were secured with our consumer residential deferrals having a weighted average loan to value of 65% and our commercials deferrals having a weighted average loan to value of 47%. 90% of the loans -- of the commercial loans, excuse me, are under that are on deferral continued 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. Non-performing assets totaled 18.5 million or 15 basis point at period end flat for the linked 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 increase, bringing the total allowance to 216.3 million and the ratio of the allowance to total loans to 1.8% or 1.89% that 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 risks 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 in the macro environment and, 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 consequences of the virus hopefully that trend 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, 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 2020, and likely, we'll continue to see into 2021 is that this pandemic has resulted in a real acceleration of what has already 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 white 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 wholesome partner in that endeavour. We need to lean into these shifts in evolving consumer preferences and behavior. I think as we think about kind of the mid and longer term impacts of the pandemic; this may infact be one of the extraordinary elements of all that happened in 2020. And then, of…

Thank you. [Operator Instructions] Our first question comes from the line of Jeff Rulis with D.A. Davidson. Your line is open.

Thanks. Good morning.

Good morning, Jeff.

Firstly, I appreciate the 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 your euro [ph] 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 cleanup 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 recovering 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, and 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 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 printed though, and 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 -- that cost savings from that branch consolidation, the most recent rounds, was included in the guidance for -- I think being 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, 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 word 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. And 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 we'll digest that and may grew your visit?

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 footprints down about 26% by square footage from back then it was 312,000. So we are approaching, I think where we would be comfortable ranch 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%, 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 lot of that good works 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.

Thank you.

Thank you. Our next question comes from Ebrahim Poonawala with Bank of America Securities. Your line is open.

Good morning, guys.

Hi, Ebrahim.

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

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 today, 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 in the place. And so that’s obviously software costs, 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 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 spin 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 just to following up on, Dean, I wanted to just better understand the margin outlook. I believe last quarter, you had a guidance for 67 basis points compression. When I look at the 254 versus the 267, 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 up?

Yes. The additional liquidity was about three to four basis points. So when you adjust for that, it was -- we would have been down maybe a basis point or two more than what I had guided to. We expect to deploy as much cash as prudent. We're still putting money into the investment portfolio. But that serves as a liquidity doubt for us, because we can cut that off pretty quickly to fund any kind of loan growth that we have. But 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, 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. 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 happen irrespective of what's happening with the pandemic, their 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 accomplished its big brother residential mortgage. But it seems like we were able to figure out ways lately year to at least flatten that product. So I think that kind of net-net represents an opportunity. Indirect is been amazingly durable. And we're only playing at the very top end of that market. Potentially, that comes together positively in 2021. So I think Ebrahim only the other consumer, which is installment for us, I think, we'll probably can see a bleed there, which is not surprising nor frankly disappointing. So my sense is that, if we can hit single digit -- mid single digit loan growth for the year, that would feel pretty good. And I think is kind of on the cusp of achievable, all things, depending on what happens with the virus outcome, right.

All right. No. That was a good color, Peter. Thank you. And Cindy congratulations. Enjoy your retirement. We miss talking to you. But thanks again for taking my questions.

Thank you.

Thank you, Ebrahim.

Thank you. Our next question comes from the line of Andrew Liesch with Piper Sandler. You're line is open.

Hi. Good morning, everyone.

Hi, Andrew.

I just want to touch on the non interest income guidance. Curious, like, what does that assuming for mortgage banking revenue? I think it's safe to project that? It'll be less this year than last year. But what does that assume for being on sale?

So a couple of things. So we did have a pretty extraordinary quarter, fourth quarter. The gain on sale was pretty wide 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 other one is some modeling with 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 years?

The guidance was 22%. Yes. 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 exploration of some grandfathered reductions that expired in 2020. So in 2021, we won't have that.

Okay. That's helpful. You've covered all my other questions.

Thanks.

Thanks, Andrew.

Thank you. [Operator Instructions] Our next question comes from the line of Jackie Bohlen with KBW. Your line is open. Q - Jackie Bohlen Hi, good morning, everyone.

Hi, Jackie.

I wanted to talk about the margin a little bit more. And just see when you think about your forward contraction, how draconian are you being with that? Meaning that, are you assuming some pretty low reinvestment rates, the 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 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 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. Thank you. That's very helpful. And I mean, I'm assuming that your 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. Thank you. Everything else I have is already answered. But I just -- I too, want to echo. Thank you for all 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.

Thank you, Jackie.

Thank you. Our next question comes from the line of Laurie Hunsicker with Compass Point. Your line is open.

Hi, thanks. Good morning. 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 it wrong number written in my notes to the forecast in terms of tax rate for next year is 22%. Is that correct?

Yes, 22.

Great. Okay, thanks. And then, in terms of PPP fees that remain of your $520 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 weighed about $37,000 [ph] 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 21st of $420 million. Do you have a breakdown in terms of what is just very high level C&I, CRE and maybe arms [ph] 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 [ph] number, and I can get it for you for the 1/23 [ph] numbers.

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

Okay, hang on. Maybe I do have the 1/23.

Yes. No, I just wonder can you had update us all your deferrals totaled 490 as of December 31. And then I thought I heard you write 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. And consumer $129. Within commercial C&I was $57 million. Commercial mortgage, $234 million, leasing $8 million. And in terms of consumer, residential mortgage was $89.8 million, home equity $21.7, auto $12.9, and other consumer, which is our unsecured product of $4.7.

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 unknown. Thanks so much.

Yes. I think your last -- your last part 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 and making those decisions as in, we only wish to make one way decisions there as 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 would -- we will begin to have those discussions internally with our directors as a lever [ph]. So I guess what I'm saying is, neither are probably on the table near term 2021. But look to see what happens latter 2021 condition wise, and I hope we can have those conversations.

Great. Thanks so much.

Yep.

Thank you. 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.