Bank of Hawaii Corp (NYSE: BOH) Q1 2021 earnings call dated Apr. 26, 2021.
Corporate Participants:
Janelle Higa — Manager of Investor Relations
Peter S. Ho — Chairman, President and Chief Executive Officer
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Mary E. Sellers — Vice Chair and Chief Risk Officer
Analysts:
Ebrahim Poonawala — Bank of America — Analyst
Jeff Rulis — D.A. Davidson — Analyst
Andrew Liesch — Piper Sandler — Analyst
Jackie Bohlen — KBW — Analyst
Laurie Hunsicker — Compass Point — Analyst
Presentation:
Operator
Good day and thank you for standing by. Welcome to the Bank of Hawaii Corporation First Quarter 2021 Earnings Conference Call. [Operator Instructions]
I would now like to hand the conference over to one of your speakers today, Janelle Higa, Manager, Investor Relations. Ma’am, please go ahead.
Janelle Higa — Manager of Investor Relations
Thank you, Michelle and good morning, good afternoon, everyone. Thank you for joining us today. On the call with me this morning is our Chairman, President and CEO, Peter Ho; our Chief Financial Officer, Dean Shigemura; and our Chief Risk Officer, Mary Sellers. 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, the actual results may differ materially from those projected.
During the call, we’ll be referencing a slide presentation as well as the earnings release. A copy of the presentation and release are available on our website, boh.com under Investor Relations. And now I’d like to turn the call over to Peter Ho.
Peter S. Ho — Chairman, President and Chief Executive Officer
Thanks, Janelle. Hello, everyone, thank you for taking the time to listen in. Conditions in Hawaii and then the Hawaiian economy in particular are improving from 2020 levels. Tourism appears poised to begin the process of re-emerging after dismal year last year and the viral environment appears controlled here in Hawaii. Home prices on Oahu, our primary market continue to perform well. Bank of Hawaii had another solid quarter of performance for the period ended March 31. Credit risk remains stable. Expense management adjusted for one-time items was strong. Capital and liquidity are growing in short, we continue to weather conditions as well and are positioned to grow as — grow nicely as the economy allows.
At this time, I’d like to highlight a few slides to give you a little more color on operating conditions, then I’ll ask Dean to provide you an overview of our finances, our financials for the quarter and Mary will discuss credit quality. I’ll conclude with some thoughts on our digital banking efforts and we’d be delighted to take your questions after that.
So, beginning with slide number 2, you see that unemployment, I was here in the islands, remains high by national standards, but is moving in the right direction for us at this point down to about 9% as of the first quarter. If you turn to the next slide, you see that UHERO, which is University of Hawaii Economic Research Organization, and is the you really big organization that we face a number of our financial models and risk metrics off of has actually revised positively. So, in the downward, revision on unemployment for both 2021 and 2022. Here in this slide, you see that we’ve been revised downward on unemployment from 10.9% in the December forecast to 7.1% is the most recent March forecast. And then for ’22, down from 5.6% in the prior forecast to 4.4% for the March forecast.
This obviously is having a positive impact on forecasted GDP as well as personal income. Here, you see that 2020 GDP was revised upwards to minus 7.5% for minus 10.2% previously. And 2021 has been revised upward pretty significantly to plus 3.7% for the year versus basically flat for the year, the prior forecast. Much of this is driven by, I think, the improving unemployment situation, but also personal income, which for ’21 is forecast to increase again on a percentage basis versus 2020 which was up already 6% for last year.
Turning to the next slide. Real estate market in Hawaii, like many markets across the nation continues to perform exceptionally well. So on the single-family home side, both year-to-date as well as March period-to-period numbers are up 17.3% for single-family home. Median sales prices, I think perhaps more significantly, inventory is just getting down to, I think, almost record levels. So we’re now down to 9 days on market for a single-family home, and inventory has dropped to 1.3 months. Condominium side performing well — not quite as well as single-family, though median sales price year-to-date up 5.8% and March point-to-point up 3.7%. Inventory conditions on the condo side remain pretty interesting as well with median days on market of 14 and inventory at 2.9 months.
Arrivals into Hawaii are beginning to pick up nicely. So you may recall that most of our forecasts had basically visitor arrivals, getting back to two-thirds historic levels by year end. Here, you see in this chart that we’re well on our way to that path. So the experience we’re having to date is indicating a strong trend in the visitor industry. And anecdotally, when you speak to people in the industry, in the hotels and the airlines, there’s a good amount of optimism for both, for the summer of this year being pretty darn strong. And most of that is, as you would imagine, being driven by US domestic, international travel is still pretty muted with most of our international markets still, frankly, struggling with a pandemic and working to normalize, I think, to a level similar to our domestic markets.
COVID cases in Hawaii are performing well. So you see on this chart, we are down near the bottom in terms of average cases per day per 100,000. That’s a good sign and has really been pretty consistent through the entire pandemic. On the next slide, you’ll see vaccination rates in Hawaii are towards the upper bound of the country. So getting good uptake there. Obviously, looking forward to getting as many Hawaii residents as possible vaccinated so that hopefully, we can move towards a herd immunity in the not-too-distant future.
So I’ll stop here. And let me turn the call over to Dean, who will update you on our finances for the first quarter. Dean?
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Thank you, Peter. Our strong deposit growth continued in the first quarter, an increase by $1.3 billion or 7.4% linked quarter and $3.5 billion or 22% year-over-year. During the quarter, core consumer and commercial deposits grew by over $1 billion, while we reduced our public time deposits by $209 million. As we continue to grow deposits, our total deposit funding costs continued to decline during the quarter, ending at approximately 9 basis points. The low funding costs provides us with flexibility for growth and is a significant contributor to our profitability and a mitigant against the impact of rising interest rates.
The quarter’s deposit increase was invested primarily in very liquid assets and to a lesser extent, loans. Total loans increased by $201 million or 1.7% linked quarter and $788 million or 6.9% year-over-year. Excluding PPP loans, core loans were approximately flat quarter-over-quarter. We continue to deploy a portion of our excess funding into liquid and safe investments and increase the investment portfolio balances by $400 million to $7.5 billion. Cash balances increased by $770 million and ended the quarter at $1.1 billion. The high cash balances and strong liquidity provides us with a stable funding source for further loan and investment growth and can be deployed to support net interest income as well as mitigate the impact of near-term rate pressures.
Net income for the first quarter was $59.9 million or $1.50 per share, up from $42.3 million in the fourth quarter and $34.7 million in the first quarter of 2020. Net interest income in the first quarter was $120.6 million, up from $119.5 million in the fourth quarter and down from $126 million in the first quarter of 2020. Included in the fourth quarter net interest income was a reduction of $3 million for an impairment of a leveraged lease.
As Mary will discuss later, we recorded a negative provision for credit losses of $14.3 million this quarter. Non-interest income totaled $43 million in the first quarter, down from $45.3 million in the fourth quarter and $46.1 million in the first quarter of 2020. The decrease from the fourth quarter was due to lower mortgage banking income primarily from lower gain on sales spread and customer derivative revenue as a result of higher interest rates. The decrease from the first quarter of 2020 was due to lower fees on deposit accounts and customer derivative revenue. We expect non-interest income will be approximately $42 million to $43 million per quarter for the remainder of the year.
Mortgage banking revenue is expected to decrease as a result of higher interest rates, but be offset by increasing deposit fees, other service charges and other transaction fees from the improving economy. In 2020, incentive compensation was reduced to support reserve provisioning. With the improving economic provisioning and earnings outlook for 2021, we anticipate incentive compensation will be back to normal levels.
Non-interest expense in the first quarter totaled $98.9 million. The first quarter’s expenses included $1.8 million related to the voluntary separation incentive program or VSIP, which was discussed last quarter, and $1.9 million in onetime charges related to the mass issuance of contactless debit cards, which allows us to place these desirable cards immediately in the hands of our customers rather than over time as existing cards expire. Adjusting for these onetime expenses of $3.7 million, normalized non-interest expense in the first quarter was $95.2 million and includes the normalization of incentive compensation of $5.9 million and seasonal payroll expenses of $2.1 million.
When compared with the pre-pandemic first quarter of 2019, which included normal and traditional incentive levels, expenses continue to be well-managed with an annualized increase of only 1.1%. When compared with the first quarter of 2020, when we elected to reduce incentives, expenses are lower in the first quarter of 2021, adjusted for extraordinary items and incentives, as highlighted in the dark blue bars on the slide.
Taking the prior discussion into account, 2021 expenses are expected to be approximately $385 million, which includes the restoration and normalization of incentive compensation. Note that incentive compensation in 2020 was down $13 million from 2019 to support reserve provisioning. Even with the restoration of incentive compensation at 2021, expenses are up only 3% over 2020 and up 0.8% per year over 2019. The effective tax rate for the first quarter was 24.09% and was driven by higher pretax income. Currently, we expect the effective tax rate for 2021 will be approximately 24%.
Our return on assets during the first quarter was 1.15%, the return on equity was 17.65%, and our efficiency ratio was 60.45%. Our net interest margin in the first quarter was 2.43%. Adjusting for the $3 million leverage lease impairment, which reduced net interest margin by 6 basis points in the fourth quarter, the margin in the first quarter was lower by 11 basis points. The decline in the margin in the first quarter reflects the impact from the strong deposit growth as well as the ongoing effects of the lower interest rate environment.
We expect that margin will decline approximately 5 basis points in the second quarter, primarily due to the increased deposit growth and liquidity. We then expect the margin will stabilize in the second half of the year. Net interest income in the second quarter will be approximately flat with the first quarter, then increase in the second half of the year. NII is expected to improve with the continued balance sheet growth, deployment of excess liquidity and steepening yield curve. These estimates exclude the impact of PPP loan prepayments, which have been volatile and unpredictable.
We maintained our strong risk-based capital levels. Our CET1 and Tier 1 capital ratios increased to 12.35%, adding to our excess capital, which is well above the minimum regulatory and well-capitalized levels. During the first quarter, we paid out $27 million or 44% of net income in dividends. Our share repurchase program remains suspended. And finally, our Board declared a dividend of $0.67 per share for the second quarter of 2021.
Now I’ll turn the call over to Mary.
Mary E. Sellers — Vice Chair and Chief Risk Officer
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 weighted average loan-to-value of 56%. This portfolio construct built on consistent, conservative underwriting and disciplined portfolio management has continued to provide us a superior outcome and allowed us to support our customers and community through these unprecedented times.
As of April 22, customer loan balances on deferral were down 85% from their peak to 2.3% of total loans. 92% of the loans remaining on deferral are secured with our consumer-related deferrals having a weighted average loan-to-value of 62% and our commercial deferrals having a weighted average loan-to-value of 47%. 89% of the commercial loans on deferral continue to pay interest. And to date, our return to payment performance has been strong with less than 1% of these customers delinquent 30 days or more at quarter end.
Credit metrics remained strong and stable in the first quarter. Net charge-offs were $2.9 million as compared with net recoveries of $300,000 in the fourth quarter of 2020 and net charge-offs of $3.7 million in the first quarter of 2020. Non-performing assets totaled $17.9 million, down $600,000 for the linked period and down $2.7 million year-over-year. Loans delinquent 30 days or more were $39.9 million at the end of the quarter, up $3.4 million for the linked quarter and down $15.6 million from the first quarter of last year. Criticized loan exposure remained flat at 2.6% of total loans.
As Dean noted, we recorded a negative provision for credit losses of $14.3 million this quarter. This included a negative provision to the allowance for credit losses of $15 million, which with net charge-offs of $2.9 million, reduced the allowance to $198.3 million, 1.63% of total loans and leases or 1.73% net of PPP balances. The decrease in the allowance is reflective of the most recent UHERO economic outlook and forecast for our market, which as Peter shared, called for lower unemployment and stronger personal income levels over the next several years, coupled with our credit risk profile. The allowance does continue to consider and provide for the potential downside risk inherent with the pandemic. The reserve for unfunded credit commitments was $3 million at the end of the quarter with a provision of $700,000 made to fund the linked period increase.
I’ll now turn the call back to Peter.
Peter S. Ho — Chairman, President and Chief Executive Officer
Great. Thank you, Mary. So digital is a hot topic these days. We thought we’d finish off with just some thoughts and some insights into where we’re trending out on this topic. First beginning with the circle. What you see there is really how we think about digital. Really, the primary focus for us is the customer experience. And obviously, for those of us that live here in the 21st century, we know that digital is an increasing component of customer experience.
We think digitally, in terms of providing online and mobile banking services, so basically being able to support and service our customers in a digital format. And then secondarily, in terms of being able to provide products and services or products, loan products or deposit products to our customers through our e-commerce platforms. We’re excited about our digital one investment. So recently, we chose to go with FIS’ D1 platform. This will enable us to move, would have been pretty good workhorse, both online as well as mobile platforms for us but really upgrade to what we believe will provide a superior UX experience for our customers, give us much better alignment of experience between our online and mobile platforms.
And then finally, with the low-code capabilities, give us much, much greater flexibility to upgrade our platforms effectively on the fly and as consumer need an opportunity warrants. The other investment that we’ve been making for a few years now is our digital sub ground, simplified by Bank of Hawaii. This really represents the e-commerce side of our digital strategy, and we’ve been very encouraged by both the sales results of both lending products as well as the deposit side, particularly in 2020 as people shifted in a meaningful way towards digital as a result of the pandemic.
Some more tactical but recent outcomes. Dean mentioned, contactless cards that is a very popular product right now for, I think, for obvious reasons, with our consumers. And we made the decision to effectively bite the bullet. And as Dean mentioned, and swallow the entire rollout in a single quarter. So we think that’s the right decision. We think that’s the right customer outcome for our customers and the feedback we’re getting so far on the rollout has been very positive. And then finally, we recently introduced live chat into our mobile platform. So this gives us the ability to interact with our customers digitally, in person, via the phone and now through live chat, which is a very popular feature.
If you turn to the next page, really, the underpinning to the strategy, obviously, is based on value creation. What we see here is just a tremendous opportunity to create operating leverage for the organization, for the franchise. And so what you see here are expenses that we’ve built effectively over the past five years, if you go back to 2015, really not a whole lot of investment in the spaces of e-commerce, data analytics, digital marketing and such.
You see from this chart that we’ve really built up not just direct investment into these spaces, but also a lot of infrastructure investment just into our overall IT platform, which for 2021 should be about $47 million. Reminding you that, that $47 million is already incorporated into the expense run rate that Dean provided to you earlier. So really, the goal here is to make the necessary investments and proper investments into our digital future, while at the same time, maintaining expenses as best as possible as well as creating what I think is a lot of upside, both from an efficiency as well as revenue opportunity going forward.
So that’s — that on the digital front. Again, thank you for listening in, and we’d be happy to answer whatever questions you might have.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Ebrahim Poonawala with Bank of America. Your line is open. Please go ahead.
Ebrahim Poonawala — Bank of America — Analyst
Thank you. Good morning.
Peter S. Ho — Chairman, President and Chief Executive Officer
Good morning, Ebrahim.
Ebrahim Poonawala — Bank of America — Analyst
I guess, just the first question, Peter, around capital, when I look at the tangible common equity or the leverage ratio is around close to 6%. Just give us a sense of how you’re managing the balance sheet. I’m assuming, liquidity could continue to come in as we think through the new stimulus that was announced back in February. Just give us a sense of how you’re thinking about capital management and how that’s informing how you’re managing the balance sheet?
Peter S. Ho — Chairman, President and Chief Executive Officer
Well, you’re right, Ebrahim. We’ve experienced and/or enjoyed 10.2% deposit growth in the past two quarters, which obviously is extraordinary, we think that’s a great testament to the brand. But to your point, is putting some pressure on capital. The risk-based measurements are looking good. And from a stakeholder standpoint, I think everyone is very comfortable with that. You’re right, the leverage ratio is undergoing some stress with that level of growth. And we’re exploring a number of different options, because we would like to get that number kind of closer to where we’ve run historically, which is at the 7% level. And I think with provisioning kind of reverting back to more traditional levels plus earnings being what they are, I think there’s a good case being made from an earnings stream standpoint that we could make that trip back with the dividend in place, perhaps with the repurchase suspended.
To the extent that we wish to accelerate back into the repurchase program, we might think through other options. And obviously, we just need to get some sense on where deposits are going to head out. If you look at deposit growth for the quarter, about 75% of that growth, so 75% of the $1.345 billion could pretty much be tied to stimulus types of activities, both on the consumer as well as commercial front. So to the extent that, that inflow continues, we’ll have to think through consequences there.
To the extent that, that slows and now we’re on the downside or the backside of that inflow, really people spending the money or hopefully businesses investing that capital into our economy. That could produce a different deposit outlook. So I think to answer your question, Ebrahim, it is on our radar screen. It’s a meaningful question. And I think really, as we’ve gotten past, I think the credit risk aspects of the pandemic. What we’re really left with dealing with and trying to get our arms around are the liquidity aspects of the pandemic, and more to follow in the next couple of quarters, I think.
Ebrahim Poonawala — Bank of America — Analyst
Got it. That’s a good perspective, Peter. Thank you. And just, Dean, following up around your expense guidance for $385 million. Just wanted to clarify, for the first quarter, are you looking at the reported $98.9 million number? Or are you looking at a core number ex the $3.7 million?
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
It would be including the onetime items.
Ebrahim Poonawala — Bank of America — Analyst
It would be including the onetime item, $98.9. Got it. And just one last question in terms of fee activity means feels like tourism is opening up, you’re seeing a rebound in activity. What’s your best sense in terms of just the second half of the year as you think about just the macro economy and the hospitality sector and the planning that’s going on to kind of get tourism up and running. Just give us a sense of what you expect, Peter, in terms of inbound tourism, what that translates into fee revenue or loan growth opportunity for the bank?
Peter S. Ho — Chairman, President and Chief Executive Officer
I think that the — well, let me start with the expectation. Ebrahim, I think that there was always a reasonable forecast of about two-third return of visitors by the end of this year. And I think as things have played out, that’s probably potentially somewhat conservative. And so we’re already seeing in the numbers, activity rebounding faster than we would have anticipated.
As I mentioned in the formal remarks, the anecdotal evidence is, frankly, even stronger than that. And really, the underpinnings behind that are: one, the vaccine rollout is working US domestically, and then when you think about Hawaii, we are kind of back to being that safe destination again and I think consumers, American consumers are desirous of taking a vacation. The options are somewhat limited because international destinations are not quite to where I think they would like to be. And Hawaii, I think, is a recipient. And then when you think about lift, which is a big component of demand or supply, if you will, of visitors into this market. The airlines are faced with a so business market likely for a while to come now. And then secondly, as I mentioned, the international routes, are just not what they used to be.
So a good amount of hardware is being repositioned into this market, which bodes well for us. In terms of what that means to the P&L statement, I think we’ll see a pretty immediate impact to that in our transactional fees, deposits and ATM and things like that. The commercial side, I’m hopeful, we’ll see a bounce, but I think that’s going to be a little bit more back-ended in terms of commercial loan growth. But probably, I would suspect we can anticipate stronger commercial growth in the second half of the year versus the first half.
Ebrahim Poonawala — Bank of America — Analyst
Got it. Thanks for taking my questions.
Peter S. Ho — Chairman, President and Chief Executive Officer
Yeah.
Operator
Thank you. Our next question comes from the line of Jeff Rulis with D.A. Davidson. Your line is open. Please go ahead.
Jeff Rulis — D.A. Davidson — Analyst
Thanks. Good morning.
Peter S. Ho — Chairman, President and Chief Executive Officer
Hey, Jeff.
Jeff Rulis — D.A. Davidson — Analyst
Maybe just a quick housekeeping item out of the way. The PPP balances, I think you mentioned $745 million is — could you atomize the round, I guess, what came on in Round 2 and maybe Round 1 forgiveness just to try to track the coming and going.
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Yeah. We originated $200 million, roughly $260 million of new loans in ’21. And then what came off was about $43 million. Mainly — almost all of it in the 2020 vintage.
Jeff Rulis — D.A. Davidson — Analyst
Got it. Okay. I appreciate it. And then maybe for Peter, I thought that slide 27 was interesting. Kind of breaking out that expense and not to oversimplify things, but if you were to overlay that on maybe the savings that you’ve called from the physical spend, what would that compare? And I guess, we’re not even capturing potentially the revenue enhancements from the digital spend or innovation. Any thoughts on how — if you were to overlay some of those factors on that slide, how that would look?
Peter S. Ho — Chairman, President and Chief Executive Officer
Yeah. I mean, I think it’s tough to give hard forecast numbers on that, Jeff. But I think that conceptually, we think that our investment into digital and digital marketing and operating efficiency gives us an operating leverage opportunity or story, if you will, that’s probably of the best we’ve had for quite some time. So we are — just to give you some color, we’ve seen teller transactions decline over the past couple of years to below 50% of total consumer teller transactions, or total, yeah — consumer deposit transactions. And that’s been picked up by both our ATM as well as our mobile deposit platforms. That has enabled us to rightsize the branch platform, as we talked about last quarter, with our in-store branches coming down.
The commerce side is looking equally as promising. Our loan products, I can tell you, are at a minimum, generating 25% of their origination, consumer origination through our direct-to-consumer channels. And our account deposit or online deposit openings now represent almost 30% of overall consumer deposit openings. So we’re seeing the — both the efficiency as well as the revenue opportunity. And the trick from our standpoint is because these things aren’t cheap, to basically be able to make that investment and then keep your expense line relatively stable through taking out or building out other efficiencies.
Jeff Rulis — D.A. Davidson — Analyst
Great. Appreciate it. Thanks.
Peter S. Ho — Chairman, President and Chief Executive Officer
Yeah.
Operator
Thank you. And our next question comes from the line of Andrew Liesch with Piper Sandler. Your line is open. Please go ahead.
Andrew Liesch — Piper Sandler — Analyst
Hi. Good morning, everyone.
Peter S. Ho — Chairman, President and Chief Executive Officer
Hey, Andrew.
Andrew Liesch — Piper Sandler — Analyst
Just a clarification on the PPP fees in the quarter, do you have that dollar amount?
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Yeah. So kind of to break it down, we had about $900,000 of fees that were accelerated due to the waivers and forgiveness that occurred in the quarter. And then in the net interest income, kind of the base, we had about $1.8 million. So in total, it was — yeah, $2.7 million.
Andrew Liesch — Piper Sandler — Analyst
Okay. And then just the pace of forgiveness, do you think that’s going to accelerate here this quarter? Just trying to get to a more of a reported margin and NII forecast.
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Yeah. The expectation is it will pick up. Last quarter, we had expected to be — to have more forgiveness. But I guess, with the new program, they were more focused on that at the SBA so we do expect second and third quarter to pick up in forgiveness.
Andrew Liesch — Piper Sandler — Analyst
Got it. Okay.
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
It’s a tough forecast because we’re dealing with borrower behavior as well as I think the SBA is pretty slam these days.
Andrew Liesch — Piper Sandler — Analyst
No court [Phonetic]. Yeah. No, it’s certainly challenging to forecast out. Just on — then just comments on loan growth, it sounds like you expect to see some commercial gains in the second half this year. Is there anything that’s giving you confidence in that right now? And then what — are there any other types that you see continuing to increase noted construction and residential mortgage have been doing well. And just kind of curious your thoughts there.
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Yeah. Yeah. Sure. So construction had a good quarter. It was up 8%. CRE was flat, C&I., net of PPP was down about 4%. And I would say, overall, the quarter for commercial was down. But really, production was not bad. Really what we saw was somewhat of an outsized paydown environment. So our rolling four-quarter paydowns are about $300 million per quarter, and I think we experienced something like $360 million in the first quarter. So a little outsized there. So I think barring another recurrence of that things should bounce back. And we’re — we look at our pipeline on the commercial front, things look — we’ve got pretty good clarity for the next quarter or two. And hopefully, as things continue to pick up economically, that will just add to that opportunity bucket.
Andrew Liesch — Piper Sandler — Analyst
Got it. That’s very helpful. Thanks for taking the questions. I’ll step back.
Peter S. Ho — Chairman, President and Chief Executive Officer
Yeah. Take care.
Operator
Thank you. And our next question comes from the line of Jackie Bohlen with KBW. Your line is open. Please go ahead.
Jackie Bohlen — KBW — Analyst
Hi, everyone. Good morning.
Peter S. Ho — Chairman, President and Chief Executive Officer
Good morning, Jackie.
Jackie Bohlen — KBW — Analyst
I wanted to catch up on expenses a little bit and understanding you had some unique moving parts within the quarter. When I think about that $385 million run rate, and I know that includes the severance and the card rollout that you had in there, the guidance is a little higher than it was last quarter. I’ve got my note that it was plus 1%. So just wondering if that’s more a factor of incentive COGS, which I would assume, takes it to mean that the outlook for the year is pretty positive or if it’s more a factor of other investments that you’ll be making?
Peter S. Ho — Chairman, President and Chief Executive Officer
It’s all of that, Jackie. It’s — yeah, so we made the decision pretty late just to go forward with the contactless rollout. That obviously is contributing to expenses. Like we would hope and anticipate, we’ve got a full slate of investments to make down the digital marketing and efficiency fronts. But we do see a much brighter outlook than even late last year, and that has given rise to a higher accrual rate on incentives. So you’re right there. And we also are experiencing about a plus $1 million outcome on our commissions expense. So as the mortgage businesses just continue to be very strong for us, that line item has come up as well. So it’s really — expenses are higher, but as we look at it generally for good reasons.
Jackie Bohlen — KBW — Analyst
Okay. Thank you. That’s good clarity. And then just related to kind of your buyback comments and the capital discussion. As you think about actions you might want to take if you decide you want to get back into share repurchases, but balance sheet growth is still pretty strong. When you think you’ll evaluate options, do you mean internal balance sheet management? Or might you look to diversify the capital stack?
Peter S. Ho — Chairman, President and Chief Executive Officer
Well, yeah, I think all options are on the table. We take a good amount of pride in the purity of our capital stack. So I would say that that would probably be the third area that we look at. The first obviously is generating quality earnings to help build capital, which we feel good about. And secondly, we’ve got some we’ve got some longer-term repos that could be a takeout opportunity. There are a bunch of intra balance sheet items, I’d say, that are probably second-shelf opportunities. And then thirdly, to the — if we just believe that we’re going to be the beneficiary of outsized market gain, yes then obviously, we potentially would be looking towards some form of additional capital potentially.
Jackie Bohlen — KBW — Analyst
Okay. Great. Thank you very much.
Operator
Thank you. And our next question comes from the line of Laurie Hunsicker with Compass Point. Your line is open. Please go ahead.
Laurie Hunsicker — Compass Point — Analyst
Yeah. Hi. Thanks. Good morning.
Peter S. Ho — Chairman, President and Chief Executive Officer
Hey, Laurie.
Laurie Hunsicker — Compass Point — Analyst
Just wanted to go back to the PPP fees for just a moment. Do you have the comparable numbers for what was in fourth quarter? In other words, the PPP forgiveness of $900,000 that was in this quarter, what it was in 4Q? And then also just the regular fees at a rate of 1%. I assume it was pretty close to $1.8 million but just if you have those two.
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Yeah. So the accelerated fees were about $400,000 in Q4 and about $2 million separately embedded in the NII on interest income for the loans.
Laurie Hunsicker — Compass Point — Analyst
Perfect. Okay. And then if you think about Round 1 and Round 2 in terms of what’s remaining, what is the actual amount of total PPP fees that now remain. Round 1 and whatever you do in Round 2? What’s your balance under that?
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Yeah. In total, it’s about $19.2 million remaining.
Laurie Hunsicker — Compass Point — Analyst
Perfect. Okay. Perfect. And then I just wanted to ask you on branches. And I apologize if I’ve missed this, but I see your branch accounts down to 63. And I know with the branch closures, it was getting down to 50. Can you just remind us where you are on the timing of closing that? And then if there are any more onetime expenses coming through separation expense on the occupancy line closure expense? And is that baked into your $385 million guide?
Peter S. Ho — Chairman, President and Chief Executive Officer
Yeah. As far as branch optimization, Laurie, I’m not foreseeing any additional expenses at this point. We took a pretty large charge, as you recall, last quarter, to bring down our in-store branch network. And there’s nothing really of scale that I see on the right. Now things change. So we’ll see. And then on the separation expense, I don’t know, do you have additional baked in there, Dean?
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Not really.
Peter S. Ho — Chairman, President and Chief Executive Officer
I don’t think so. Although we’re always looking for opportunities to rightsize areas that make sense to rightsize. And today, we’ve been very proud of the fact that we’ve not had any layoff scenario straight through the pandemic and basically, we’re looking at early retirement opportunities as really the path to efficiency at this point. And that opportunity may afford itself later this year. I’m just not sure.
Laurie Hunsicker — Compass Point — Analyst
Okay. Okay. Great. And then, I guess, just a very high-level question, Peter. We have seen a lot of recent M&A, and this is an unusual time to be doing it, where buyers stock currency obviously can go up. And we just haven’t heard a refresh on your thoughts around M&A. And so given that you have one of the strongest stock currencies of any of the regional banks out there at 2.7 times. Can you just refresh us on how you think about whole bank M&A and what your approach would be or if it’s unchanged? Thanks.
Peter S. Ho — Chairman, President and Chief Executive Officer
Yeah. Well, it’s pretty unchanged, Laurie. We’ve — we for 20 plus years, 21 years now, have been pretty committed to building an organic growth story in markets that we know and understand well and have a great market presence. And we think that’s resulted in a great valuation. And basically, the color we’re getting from that from our shareholders is that they kind of like that concept and more of the same would be warranted. So yes, I don’t foresee despite the strength of our stock, I don’t foresee that pushing us into a different M&A vector at this point, no.
Laurie Hunsicker — Compass Point — Analyst
Okay. Great. Thanks for taking my questions.
Peter S. Ho — Chairman, President and Chief Executive Officer
Sure.
Operator
Thank you. And I’m showing no further questions at this time. And I’d like to turn the conference back over to Ms. Janelle Higa for any further remarks.
Janelle Higa — Manager of Investor Relations
I’d like to thank everyone for joining us today and for your continued interest in Bank of Hawaii. Please feel free to contact me if you have any additional questions or further clarifications on any of the topics discussed today. Thank you so much, everyone.
Operator
[Operator Closing Remarks]