First Hawaiian, Inc. (FHB) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the First Hawaiian, Inc. Q1 2021 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Kevin Haseyama.

Thank you, Sylvia. And thank you, everyone, for joining us as we review our financial results for the first quarter of 2021. 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 may 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.

Thank you, Kevin. Good morning, everyone. I appreciate you joining us today. Turning to Slide 2. I'll start by giving a quick update on the current situation in Hawaii. Overall, the state continues to do a good job of controlling the spread of COVID-19. The number of new daily cases remain steady, and the vaccine rollout is going well, and there are no issues with hospital capacity. As of Wednesday, the statewide 7-day average of new cases was 80 and the corresponding positivity rate was 1.6%. Also on Wednesday, the CDC reported that Hawaii had the lowest 7-day case rate per 100,000 residents of all 50 states. Vaccine rollout continues to go well. Through Wednesday, about 44% of those 18 years and older, had received at least 1 dose and 32% have been fully vaccinated. We're also seeing signs of recovery in the visitor industry with the average daily visitor arrivals steadily increasing since the start of the year. Also this week, the state announced that effective May 11, inter-island travelers who have been vaccinated in Hawaii and have completed the required 14-day waiting period, will be exempt from pre or post travel testing and quarantine requirements. While it's not a full vaccine passport, it's certainly a step in the right direction. And the state's seasonally adjusted unemployment rate remained high at 9% in March, we're hopeful that as visitor arrivals continue to increase and the local economy continues to reopen, the unemployment rate will improve. Housing market remains very strong. In the first quarter, median single-family home price on Oahu was $915,000, up 17% over the prior year. And the median condo price was $455,000, up 5.8% from the prior year. Also pleased to report that last month, we published our third annual ESG report. In this year's update, we have adopted the SASB reporting framework, and our report is available for download on our Investor Relations website. Turning to Slide 3, I'll briefly go over our first quarter results. While the outlook for the local economy is getting brighter, the first quarter remained challenging. Growth in loans was driven by PPP loans as we originated $459 of new PPP loans. Deposits grew by $906 million, driven by growth in consumer and commercial deposits. Credit quality remained excellent. Our credit metrics have continued to improve and over 96% of borrowers who went on deferral have returned to pay. Diluted EPS was $0.44, and the Board maintained the dividend at $0.26 per share. Finally, we completed several significant customer-facing technology projects in Q1, highlighted by our completely redesigned website, fhb.com. At the end of the presentation, I'll make a few comments on our digital strategy. And now I'll turn it over to Ravi to go over the financials.

Thank you, Bob. Turning to Slide 4. Period-end loans and leases were $13.3 billion, unchanged versus the prior quarter. PPP loan balances grew by $358 million, as we originated over 3,600 loans for $459 million. In Q1, we shifted resources from processing forgiveness applications to originating new PPP loans. As a result, the number of loans forgiven in the first quarter was less than expected. Mortgage loan balances were up slightly. Originations were strong in the quarter, but repayments were also high. C&I balances, excluding PPP loans, declined by $256 million, driven by $181 million decline in dealer flooring balances and a $41 million decline in shared national credits. Strong demand for new cars, both locally and on the mainland, depleted dealer inventories and drove down flooring balances. Looking forward, we reiterate our view that full year loan growth, excluding PPP, will be in the low single-digit range. Turning to Slide 5. Total deposit balances ended the quarter at $20.1 billion, a $906 million increase versus the prior quarter. This increase was driven by growth of $1.2 billion in consumer and commercial deposit balances, partially offset by a $269 million decrease in public deposits. Consumer and commercial deposit balances in the first quarter benefited from both stimulus payments and PPP loan disbursements. Our cost of deposits fell 3 basis points to 8 basis points in the quarter. Turning to Slide 6. Net interest income was $129.2 million, a $6 million decrease versus the prior quarter. The decrease was primarily due to average yields, lower average yields and balances on loans. Net interest margin was 2.55%, a 16 basis point decrease from the previous quarter. As expected, asset and liability repricing contributed about 7 basis points to NIM compression. Excess liquidity, driven by the significant increase in deposits, added another 6 basis points of NIM compression. And lower fee income, because of the lower amount of PPP loans forgiven versus the prior quarter contributed another 3 basis points of NIM compression. The number of PPP loans forgiven in the first quarter declined from the prior quarter due to reallocating resources from processing forgiveness applications to originating new PPP loans. We have shifted those resources back to processing forgiveness applications. Over the next few quarters, we expect PPP loan forgiveness along with stimulus money to cause liquidity levels to persist. In Q2, we expect the net interest margin to decline 5 to 7 basis points, excluding the impact of PPP and excess liquidity. Turning to Slide 7. Noninterest income in Q1 was $43.9 million, down $9.7 million from the previous quarter. Q4 noninterest income was elevated. Due to onetime items, including a $7.1 million gain on sale loans, a $1.2 million gain from an unsettled tax liability and a $0.9 million reduction in network associated dues, which was booked as contra income. These onetime impacts in Q4 were offset by a $4.8 million charge associated with the vis-à-vis swap. In Q1, our income related to customer swap agreements was down $0.9 million due to low customer activity and BOLI income was down $1.8 million. Looking forward, activity based items such as credit and debit fees and merchant services have started to recover. And we expect further recovery as tourism increases. Swap fee income impacted by low loan growth and a stable low rate environment will most likely increase during the second half of the year, as loan growth starts to pick up. We also expect a recovery in BOLI income in the second quarter. Given these factors, we anticipate that noninterest income will bounce back to this $47 million to $48 million range in the second quarter. Turning to Slide 8. Noninterest expenses were $96.3 million, $8.2 million higher than the previous quarter, and the efficiency ratio was 55.5%. Salaries and benefits increased approximately $1.2 million over the prior quarter. This was mainly driven by a small increase in salaries, annual bonuses and inflationary increases in our health care costs. In Q1, the bank launched its new website, fhb.com. The expenses associated with the implementation of the new website and other technology initiatives added approximately $2.2 million to contracted services. In addition, to support the origination of the second round of PPP loans, in the first quarter, we added temporary support to help process over 3,600 loans. This led to onetime expenses of around $1 million in the quarter. Other operating expenses increased $3.3 million versus the prior quarter, of which approximately $1.2 million was nonrecurring. For the full year 2021, we continue to expect expenses to be about 7% higher than 2020 expenses. And now I'll turn it over to Ralph to go over asset quality.

Thank you, Ravi. If I could turn you to Slide 9, I'll speak to our credit profile. Asset quality continues to hold up, and the signs of the recovery are starting to emerge. In Q1, realized credit costs remain low. Net charge-offs for the quarter were $4.59 million, higher than our prior quarter, but within expectation. Annualized, our net charge-off rate was 14 basis points, lower than the rate for 2020 and 2019. We did not record a provision for the quarter. NPAs and 90 days past due loans were marginally down this quarter with a 1 basis point decrease to 14 basis points. Criticized assets continued to decline, dropping from 4.23% of total loans in Q4 of 2020 to 3.47%. The anticipated increase in past due loans has not yet materialized. Loans 30 to 89 days past due declined 3 basis points quarter-over-quarter to 27 basis points. Our return to payment experience and COVID related deferrals has been strong and reperformance of those loans continues to be very good. Moving to Slide 10, we see a roll forward of the allowance for the quarter by disclosure segments. The reserve decreased about $8.1 million to $200.4 million. This amounts to 1.51% of all loans and 1.65% net of PPP loans. Maintaining our view for the recovery in the second half of the year, our economic outlook was unchanged. And the bank retained a COVID-related overlay as a component of the reserve. While we're encouraged that asset quality metrics remain strong, it is important for us to monitor factors that drive expected credit losses over the next 1 or 2 quarters, looking for evidence of improvement before changing our outlook. Turning to Slide 11. We show the composition of the commercial portfolio by risk rating as of quarter end. We continue efforts to manage at risk credits with the intent to reduce future credit costs by executing on specific plans for each of these loans. Since a peak reported at the end of Q2, we've seen a decrease of $281 million in criticized loans or 193 basis points. The reductions have come on a combination of loan sales, repayments, refinancings and upgrades. Special mention loans are down $262 million or 182 basis points from the Q2 peak, and classified loans are down $20 million or 10 basis points from the peak. Finally, on Slide 12, we see the status of loans that have received deferrals at the start of the pandemic. About 97% of these loans by balance have completed the deferral period. Around 96% of those borrowers have returned to payment with a small portion offered a second deferral based on additional considerations. Reperformance continues to be strong, delinquency rates low. At this point, most loans that are under deferral or modification are secured residential mortgages. Now let me turn the presentation back to Bob.

Thanks, Ralph. Before I wrap up, I wanted to say a few words about our technology investments, and how they fit into our digital strategy. So if you go to Page 13, when you look at this, with over 160 years of history, we've served as a trusted adviser to our customers, creating deep and lasting relationships while becoming a hub of their financial lives. In the digital area, we had to rethink what it means to be a relationship bank and how we can evolve to meet customers' changing expectations. With our digital transformation, we will continue to creating deep and lasting relationships, and we use data and technology to improve the customer experience through access, convenience and personalization. From an infrastructure perspective, our plan is to build a scalable, portable platform that will enable us to drive down costs over time. As we've discussed on prior calls, we continue to work on our core system replacement. Built on a micro services and open API framework, it will serve as a backbone that allows us a more flexible and modular approach to integrating our digital platforms and data sources. In the first quarter, we completed several customer-facing projects. We introduced a refreshed fhb.com website, rolled out a new online consumer loan origination platform, and a reimagined personal financial management tool. Additionally, we completed development of our new and enhanced mobile banking application, which brings new functionality, access to innovative budget and finance tools and the ability for us to deliver personalized experience and advice when it launches in the coming days. With that, I'll turn it back to Kevin.

Sylvia, we'll take questions now.

[Operator Instructions]. Your first question comes from the line of Ebrahim Poonawala from Bank of America.

I guess, just first question, Ravi, around the margin outlook for 5 to 7 basis points decline. Can you tell us when that begins to moderate with like if rates stay as is, when does that level off, the 5 to 7-point basis point core decline?

Yes, Ebrahim, this is Ravi. I would say that as we start to see moderation in some of the refinancing activities on our balance sheet. That's one aspect. Mortgage has been extremely active this quarter. Fundamentally, if you look at kind of where our Q1 yields were, we got a little bit of room. We've got a little bit of room in the balance sheet for a little bit of repricing in the mortgage portfolio in particular. We feel like there's probably some more room in the securities book as we start to see kind of a moderation of the level. We're at $6.7 billion for the quarter. And where we see runoff, about $100 million to $120 million per month rolling off and replenishing those. Depending on where spreads are and yields are, we could see a little bit of decline in the securities book with respect to the NIM. And I'd just say, maybe on the deposit side, 1 to 2 basis points, we could probably see some room. We're already at 8 basis points for the quarter. So there's probably opportunity there to see kind of where NIM will land sort of for the long term.

And what's the remaining PPP fees, Ravi, that you expect to recognize? And what's the timing of when you think it's going to get amortized?

Yes. It's about $24 million to $25 million.

It's just over $25 million, EP. This is Bob. And as we go through the process, as we've said before, we have them on straight-line amortization. Of course, that gets accelerated with forgiveness. So as we go through the forgiveness process, the first round from last year will be really -- probably a lot of that will happen this year in the next 18 months. But it's really borrower dependent. So it's not something we control.

And how much is first versus second? Do you have that, Bob, the breakdown?

I don't have that, but we can work on that for you. Kevin, do you have that handy?

Well, the second round was around $459 million of new loans.

He's talking about the fee...

Sorry, I don't have that right now.

We'll get back to you with that, EP.

That's fine. And on a separate note on the dealer finance loan. So I guess the drop-off wasn't surprising. What's your outlook there, Bob, in terms of does it come back, given what's going on with auto inventories, et cetera? Just give us a sense of where you see that business headed in the next few quarters?

Sure. And I've spent a lot of time talking to them. I'm going to be up in the mainland a couple of weeks, talking to more of them. If you look at the 4-year average ended in 2019, our outstandings were $850 million. And right now, we're right about $400 million less than that. So there's a tremendous amount of room for growth. And while there's been some give and take on the lines, essentially the same size. So it really is driven by when manufacturers can come back up to speed and produce in volume, which, of course, we can't predict. But certainly expect some of that before year-end. And as ship shortage and other supply bottlenecks get worked out, we expect a pretty strong recovery in dealer flooring balances.

Got it. So you do think by the end of the year, some of that $400 million gets picked up. And then you may or may not return back to that $850 million this year, depending on -- with the 1 manufacturer.

Sure. It's not driven by us. It's really driven by the manufacturers. Of course, the dealers would like to sell a lot of cars and keep low inventory, but I think that dynamic will start to change as well as things normalize in the broader economy.

Your next question comes from the line of Steven Alexopoulos from JPMorgan.

Bob, I wanted to start. So if I look at the Hawaiian economy, state is making good progress on vaccines. Visitor arrivals are improving. The unemployment rate is still a bit high. How would you describe sentiment amongst business customers today? And are they starting to move forward with increased spending and investment? Or are they still really waiting for the economy to more fully open?

I don't know if we're at the point where they're ready to make that decision yet, Steve. I think they're just really happy that there's a lot more tourists, and I think they're really trying to reengage and reopen strongly to be able to serve all those tourists. Like many places, there have been some shortages of rental cars and that sort of thing. The hotels are ready to go. Talking to those folks, they are absolutely ready to go. There are a few little kinks in the armor to work out, restaurants, again, opening at reduced capacity, struggling a little bit to find people candidly, even though it has high unemployment rate that people have talked to. But that as well will work itself out fairly soon. So getting through the reopening and then looking at investments, I think that will be the next step.

Got it. Okay. That's helpful. And when we look at the reserve, so we had no provision taken in the quarter. The reserve is still well above where you were after day 1 CECL. My question is what held you up for more meaningfully releasing reserves this quarter? And should we expect the pattern of no provision until the reserve gets closer to the day 1 CECL amount?

Yes. Maybe I'll start, Steve, this is Bob, and I'll hand it off to Ralph. Really, what we're looking for is, while there's -- as we just talked about, a lot of very good signs in the economy here, it's still a little bit early to make a call on recovery yet. And I think those are the indications we're looking for. So I think over the next couple of quarters, we'll have a better idea on that. But Ralph, anything you'd like to add?

Yes. Steve, I don't have a lot more to add. I think everything is starting to line up the way that we had hoped it would. And I do think that we just need to see what happens in the next couple of quarters and see if this really takes hold. But I mean our outlook was for a second half recovery, and we're really starting to see that now.

Okay. That's helpful. And then on the PPP loans, are there any steps you guys could share in terms of how many of these were for new versus existing customers? And have you been able to use that as a tool to bring new relationships into the bank?

We've done some of that. We have a large customer base. And so servicing our existing customers is the bulk of our loans, quite frankly. There were some new relationships that came into the bank with that. Interestingly, relative to, I think, some of the national numbers we're seeing for the second round, a majority of our borrowers were already had gotten a PPP loan with us. And the number of new PPP first time borrowers was less. And I think that's a little different than we saw in the rest of the country. But I think that goes to where the economy has been in Hawaii. We've -- people have been struggling, and that's really been just a terrific bridge for them to get to the other side of this.

Okay. That's helpful. And just one last one on personnel related. So I've been a big fan of Chris Dods, so I was happy to see him get the promotion as COO. Are you planning to backfill his prior role now? Or will he continue running the digital transformation?

He's in the room, so I have to be careful what I say, Steve. But no, I -- we just added to his responsibilities. He has a great work ethic. So -- no, he will still be working on the digital transformation. And really what it comes down to is I just want to make sure that Chris had all the tools to wrap around to do the full suite of not only technology, digital and transformation operations, make sure they're all integrated and that we'll get a better result at the end because of that.

Your next question comes from the line of Jackie Bohlen from KBW.

I just wanted to go back to the loan portfolio and talk about some of the other portfolios and just their performance versus expectations. Understanding the pushes and pulls in commercial and the reiterated overall growth guidance. Are consumer balances behaving as you would have expected.

Yes. I would say I think we're doing better than we would have expected on the consumer side. We had stood up a modification program. We had a lot of people working on putting something in place. And we really didn't see that. We saw just really good return to payment. And as you can see from the statistics in the slide, not a lot of people on a second deferral. So I think we're doing better-than-expected there.

And Jackie, this is Bob. I just want to make sure, was that your question? Or was it a credit-related question? Or was it a growth-related question?

It was growth related, but I was going to get to the credit component. So it'll just reverse my order.

Yes, sure. Let me take the other side then, unless you have a question for Ralph. But growth, consumer loan growth has been very muted over the last year. We just aren't seeing a lot of demand in that space. We're seeing some in indirect auto as car sales have been strong, but even that is at a lower level than it had been in previous periods. Besides that other than, I think, residential lending, Ravi, is there anything else that has outperformed?

No, I think that covers it.

Okay. And so is the consumer decline, is that purely a function of demand? Or is there some function of intended runoff occurring in that portfolio?

Primarily demand, but there are a couple of segments of that portfolio. We were bringing down the balances a little bit, really subsegments of existing portfolios, but certainly not broadly in any of the different categories.

Okay. And does that -- are you largely complete there? Or is it still a little bit more of a headwind? And I know that's not a major driver. I'm just curious.

No. Absolutely. A very fair question. I think we're where we want to be, and now it's going to be much more demand driven.

Okay. And then you touched on the single family. But just curious, I've seen a lot of contraction at other banks, and you had some good expansion in the quarter. Was that related to what may have been purchased versus put in the portfolio and maybe the mix is just a little different than some other banks? Or is there anything else that play there?

Jackie, this is Ravi. Certainly, that was one of the components in Q1. We just had lower mortgage sales in the quarter, and we're portfoling more on an absolute level. I would just say that the activity levels in the mortgage business have been extremely high, both from a refinancing activity and now looking forward, certainly from a purchase perspective. As we start to really move through the origination pipeline, we see potential good opportunity for us to continue to build balances in the future.

And maybe just a finer point on that. This is Bob. So at some point, the refinance will slow a bit just because of where rates are at. But we do have several projects later this year, large condominium projects that we're supporting with loan opportunities, and we think that will help us in the back half of the year.

Okay. That's helpful. And then just one last quick one. I have a follow-up probably for you, Ralph. I got my notes that the overlay was 28% of the reserve at year-end. Do you happen to have that number or just a general place of it now?

It's about the same level.

Okay. So no change.

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

One question just on the margin guidance, down 5 to 7 basis points, excluding the impact of PPP and excess liquidity. So is that excluding the 6 basis points and the 3 basis points that you highlighted for this quarter. So should we add that back in and then take out the 5 to 7 basis points?

It does exclude those two components. But given where we are right now, maybe I'll give a little bit of color on each of those components. Excess liquidity with respect to what's kind of what could potentially happen in the future. Certainly, we haven't seen the next round of stimulus come through. And since Andrew, we had the state operating account, there's potential opportunity in terms of liquidity that the state operating account could increase over time and maybe impact the NIM, in particular, with respect to how much we have on the balance sheet in terms of excess liquidity. So there's some uncertainty on the amount of excess liquidity we could experience over the next couple of quarters. On PPP loans, we're certainly back to -- going back to focusing on forgiveness. And so to the extent that forgiveness picks up in the next couple of quarters, we could also see sort of an uptick on the margin as a result of that. So those are the 2 factors that are outside of the 5 to 7 basis points that have some sources of uncertainty for the future.

Got it. Okay. That's helpful. And then the fee income guidance to return to -- a rebound of the $47 million to $48 million range. I guess I would have thought this if I back up some of the noncore items in the fourth quarter, fees were closer to $50 million in the third quarter, closer to $49 million. I would expect, especially with the state reopens and tourism is coming back stronger than you could at that fee income could actually come in stronger than the range you're providing? I guess what sort of conservatism do you think you might have there? Or what are you seeing that I might not be?

Yes. Maybe I'll hit on a couple of items. That's an excellent question. I think to the previous question, we are certainly portfoling mortgage loans on the book. That contributed about $1 million in noninterest income in terms of a difference quarter-over-quarter. And so that's sort of a muting effect on kind of what we're seeing. I'd just say that activity levels, particularly in credit and debit card fees, we will respond over time, but that will take some time as tourism recovers. And maybe just thinking a little bit about the deposit fee line and service charges. There, I would just say that we're benefiting in many ways from a significant amount of liquidity on the balance sheet. And certainly, from the credit perspective, but that tends to have a muting effect on service charges on deposit accounts because customers have a lot of liquidity. And as a result, those fees tend to be muted in that area. So when you put all those pieces together, Andrew, that's kind of why we've given the 47% to 48% guidance.

Got it. Okay. That's very helpful.

[Operator Instructions]. Your next question comes from the line of Jared Shaw from Wells Fargo.

So I guess going on -- looking at the tech investment, in the tech plan. Are you planning on having this centralized under 1 provider? Or is this going to be -- go out and get the best of each option and then aggregate things together on the back end?

Very good question, Jared. This is Bob. It's a complicated answer, to be honest with you. We have 1 core provider that does our core services. Around that core provider and that's FIS. And around them, we have a number of different systems that we use from outside providers. For example, our credit card provider for many, many years has been TSYS and our ATM driver is somebody else. So that world is -- while we're simplifying it quite a bit by moving to our new core, it isn't monolithic. And we do have other systems that we are wrapping around that and doing it with the API and microservices technology to make it very streamlined and seamless. But no, it's not just 1 core provider for everything we use.

And then going forward, when you have those microservice-based systems, will you be able to tailor products or make tweaks here or there in-house? Or will you still need to depend on partners to help implement those changes?

It's going to be a combination of both. One of the advantages of the micro services architecture is that you can swap out providers relatively easily. And then for what their offering that you're using, you have a choice generally of how much you want to customize. And so the benefits of customization versus the cost of creating and maintaining the customized system is something that you have to wait for each one of the different offerings.

Okay. Great. And then just more broadly on the reopening and the tourism returns. Is the labor pool in market sufficient to handle a full reopening it? Or will part of that depend on people coming back to the island that may have left. Like in the past, you had mentioned the more hourly wages or the people at the tourism-facing areas had left? Are they coming back? Or are we still having to wait to see the pool increase?

I don't have perfect clarity on that, to be honest with you. I think some people might have left. I think a lot of people are getting help from various support programs government provided, and so that's been a big help for them. And there has been, as you've seen in other places, somewhat of a reluctance to go back too soon to work when those support programs are in place. But I don't think there's been an exodus to the point where we wouldn't be able to support a fairly large return to tourist economy. Remember, it wasn't that long ago in 2019 we had 10 million visitors. And the -- I think part of the reluctance to return to work is people want to get their vaccine shots first. And so with all this dynamic happening at the same time, I think we're good for a while. Time will tell as we get back to really full employment and a robust tourist economy. Too early to make that call.

[Operator Instructions]. Your next question comes from the line of Laurie Hunsicker from Compass Point.

I just wanted to make sure I'm reading this right on Slide 12. Looking at the deferrals of adding the original plus the subsequent on an $81 million of total deferrals for your bank, that's down from $725 million last quarter. Is that correct?

Let's see. I'm pulling up the slide as you're talking about.

Yes. So I'm looking at the original deferrals are now at $11 million total and then the subsequent deferrals showing at $70 million. So just $81 million versus.

That's correct.

That's fabulous. Okay. Great. And then, Ravi, I just -- I wanted to go back to expense guide. So you reiterated you're still looking at a 7% up relative to last year. If you look at this quarter, you're 96.3%, if we strip out the nonrecurring, you're down to $95 million, but then that's suggesting that you're going to be running at $99 million or so per quarter for the next few quarters. Can you just help us think about that? Or what am I missing?

Yes. Let me go through some line items to kind of get you to kind of where we see things going in the future. We certainly see, as I mentioned in the previous call, card reward expenses continuing to move up as we start to see increases in activity over the course of the year. Q1 tends to be a little bit elevated because we look at it in arrears, and we're coming off the holiday season. So for the rest of the year, we could see typically lower levels in Q1, but as activity increases, those numbers will go up. I think we've talked a little bit about expenses related to the implementation of core. We're going to have trading expenses that will be expensed. And then as you look to the core being implemented, we'll pick up some in depreciation expense also. And we've talked about the investments we've made in technology in the new fhb.com. We're in the process of refreshing our mobile application. And then as a result, marketing and advertising expenses will increase over time as we support the new website. We put in some of these technology applications and we support the new mobile application, too. And I think as we continue to see increased loan demand over the course of the second half of the year, we should see incentive comp increases from Q1 levels, and that will also cause our expenses to move up a little bit. And then looking at sort of the regulatory fees, we have a bigger balance sheet. And the bigger balance sheet means that our regulatory expenses will probably increase over time. But those are some things to sort of anchor around as you look forward to kind of what we've given as guidance as and where we are currently. Hope that helps.

Yes, that's helpful. How should we think about tax rate for next year?

Yes. So our tax rate, I think our taxes, in particular, I think our tax rate was a little bit below 25% in the quarter. What we have currently is in terms of tax credits is a pretty strong [indiscernible] portfolio. So if you think about that as an absolute dollar level of tax credits to offset sort of tax expense. As we look to the future and frankly, activity picks up, loan demand increases, we're going to start to see increases in the performance of the firm. And so when you think about a fixed amount of credits against an increasing sort of revenue base, you're going to see a pressure on the tax rate going forward. But that's a good thing because we're earning more money. We're certainly looking at the tax line to try to manage that very closely.

Okay. Great. And then just one last question. On the PPP fees, and I appreciate the Slide 6 and the clarity you've given. But can you just help us think about just what were PPP fees in this quarter? And if you have the split between what was the 1%? And what was the forgiveness? And I think I had the level of PPP fees for last quarter was $1.5 million. Just wanted to know what the breakdown was in net interest income for this quarter?

So yes, Ravi, please, go ahead.

Yes. Let me see if I'm getting that question correct, Laurie. You're asking about the breakdown between forgiveness and fee income in the quarter?

Yes. Well, specifically, what I'm most focused on is what was the forgiveness amount versus that 1%, which is obviously dragging on your margin, but the forgiveness is going to work the other way. So what was the forgiveness amount in this quarter? And I believe for last quarter, it was $1.5 million, but it could have last quarter's wrong.

Yes. So what I have in this quarter was about $1.5 million in forgiveness. And last quarter is estimated a little bit over $2 million, $2.2 billion.

I'm sorry, $2.2 million?

$2.2 million, yes.

$2.2 million. Perfect.

I show no further questions at this time. Are there any further remarks?

I'll just wrap up by saying thank you, Sylvia, and thanks, everyone, for joining us. We appreciate your interest in First Hawaiian. Please feel free to contact me if you have any additional questions. Have a good weekend.

Ladies and gentlemen, this does conclude today's conference. Thank you again for your participation. You may now all disconnect.