Categories Earnings Call Transcripts, Finance

First Hawaiian, Inc. (FHB) Q2 2021 Earnings Call Transcript

FHB Earnings Call - Final Transcript

First Hawaiian, Inc. (NASDAQ: FHB) Q2 2021 earnings call dated Jul. 23, 2021.

Corporate Participants:

Kevin Haseyama — Strategic Planning & Investor Relations Manager

Robert Harrison — Chairman, President and Chief Executive Officer

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Ralph Mesick — Vice Chairman and Chief Risk Officer, Risk Management Group

Analysts:

Steven Alexopoulus — J.P. Morgan — Analyst

Jackie Bohlen — KBW — Analyst

Ebrahim Poonawala — Bank of America — Analyst

David Feaster — Raymond James — Analyst

Andrew Liesch — Piper Sandler — Analyst

Jared Shaw — Wells Fargo — Analyst

Laurie Hunsicker — Compass Point — Analyst

Sean — UBS — Analyst

Presentation:

Operator

Good day, and thank you for standing by. Welcome to the First Hawaiian, Inc. Quarter Two 2021 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your first speaker for today, Investor Relations Manager, Kevin Haseyama. Thank you. Please go ahead.

Kevin Haseyama — Strategic Planning & Investor Relations Manager

Thank you, Ann, and thank you everyone for joining us as we review our financial results for the second 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.

Robert Harrison — Chairman, President and Chief Executive Officer

Thank you, Kevin. Good morning, and thanks for joining us today.

I’d like to start with a quick update on the state of Hawaii. This is Slide 2 in the deck. We continue to see a steady increase in visitor arrivals and are approaching pre-pandemic levels with almost 100% being from the mainland U.S. Restrictions on transpacific travel were further eased starting on July 8 when individuals vaccinated in the mainland U.S. were also allowed to enter Hawaii without a pre-travel COVID test.

The economy continues to recover as the unemployment rate fell to 7.7% in June, a 15-month low and the housing market remains strong. We are continuing to make progress towards the goal of having 70% of the population vaccinated, at which point, all COVID restrictions are expected to be removed according to statements by the Governor. Similar to the rest of the country, we have seen increases in new cases recently and the test positivity rate which authorities are closely monitoring.

Turning to Slide 3, I’ll briefly go over our second quarter results. We have a very good quarter. We saw a broad-based pickup in loan activity, strong deposit growth, a rebound in non-interest income while credit quality remained excellent. Total loans grew by $151 million excluding the impact of PPP loan paydowns with growth coming in multiple categories. Deposit growth continued to be driven by commercial and consumer deposits. Diluted EPS was $0.67 and the Board maintained the dividend at $0.26 per share. We also repurchased $22.4 million of common stock under the current share repurchase program.

And now, I’ll turn it over to Ravi to go over the financials.

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Thanks, Bob.

Turning to Slide 4, period-end loans and leases were $13.1 billion, down $197 million from the end of Q1. PPP balances declined $348 million. Excluding PPP balances, C&I declined by $209 million, primarily due to $179 million decrease in dealer flooring balances. Excluding the impacts of PPP forgiveness and dealer flooring balances, total loans grew $330 million, or 2.8% in the second quarter. We were pleased to see good growth this quarter in many categories, including commercial real estate, construction and residential loans, each growing by over $100 million. The loan pipeline is building and 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 $20.8 billion, a $701 million increase versus the prior quarter. This was driven by a $769 million increase in consumer and commercial deposits and partially offset by a $67 million decrease in public deposits. Our cost of deposits fell 1 basis point to 7 basis points in the quarter.

Turning to Slide 6, net interest income was $131.5 million, a $2.3 million increase versus the prior quarter. The increase in net interest income was primarily due to higher average balances of investment securities and lower balances and rates on time deposits. Net interest margin was 2.46%, a 9 basis point decrease from the previous quarter. Core asset and liability repricing contributed about 4 basis points of NIM compression while excess liquidity caused about 8 basis points of additional compression. Just a reminder, we currently consider excess liquidity as balances over $500 million. The decline in NIM was partially offset by higher income due to the higher balance of PPP loans forgiven versus the prior quarter, which increased net interest margin by about 3 basis points. In Q3, excluding the impact of excess liquidity and PPP loan forgiveness, we expect our net interest margin to decline 3 basis points to 5 basis points.

Turning to Slide 7, noninterest income in Q1 was $49.4 million, a $5.5 million increase over the previous quarter. Noninterest income was driven by a nice increase in credit and debit card fees and merchant services interchange, which in total contributed $2.2 million to the increase this quarter. Other service charges increased $1.5 million of which approximately $1 million was from one-time fees generated by our commercial customers.

Swap fees increased to $800,000 and BOLI and trust income increased $900,000 this quarter. Noninterest expenses were $99.4 million, $3.1 million higher than the previous quarter. The increase was driven by a one-time charge of $1.2 million in salaries and benefits and $1.4 million in higher card rewards expenses which was due to higher activity. The remaining increase was primarily driven by higher sales incentives paid in the quarter. The efficiency ratio was 54.7%. On a year-to-date basis, expenses are running about 4.1% higher than the same period last year. However, we continue to expect full year expenses to be about 7% higher than in 2020.

And now, I will turn it over to Ralph to go over asset quality.

Ralph Mesick — Vice Chairman and Chief Risk Officer, Risk Management Group

Thank you, Ravi.

If you could turn to Slide 8, I’ll make a few comments on credit. Asset quality continues to hold up and the recovery is underway with a strong return of mainland tourists. In Q2, the net charge-offs for the quarter were $1.1 million, well below the $4.6 million recorded in the prior quarter. Our year-to-date annualized net charge-off rate is at 9 basis points, significantly lower than the levels in 2020 and 2019. The Bank recorded a negative $35 million provision for the quarter. NPAs and 90-day past due loans were marginally down this quarter with a 2 basis point decrease from the prior quarter to 12 basis points. Criticized assets continued to decline as well dropping from 3.47% of total loans in Q1 to 2.51% in Q2. Loans 30 days to 89 days past due declined 5 basis points to 22 basis points at the end of Q2.

Moving to Slide 9, you see a roll forward of the allowance for the quarter by disclosure segments. The $35 million negative provision we recorded this quarter came on a more optimistic outlook and improvement in the portfolio of credit quality. The allowance decreased by $31.2 million to $169.1 million which is 1.29% of all loans and 1.38% net of the PPP loans.

And with that, I’ll turn the call over to Bob.

Robert Harrison — Chairman, President and Chief Executive Officer

Thanks, Ralph.

Finally, you may have seen the announcement last week of the addition of two new directors to the Board, Kelly Thompson and Jim Moffatt. Their combined expertise in the areas of technology, strategic planning, risk management and e-commerce will provide valuable insight and guidance as we execute our digital transformation.

As I mentioned on the last call, we introduced a redesigned fhb.com website and a new mobile banking app that includes features such as third-party account integration and personal financial highlights. The improvements have been well received as the number of visitors to our website has increased and they are staying longer with higher levels of engagement. We have also seen an over 500% increase in the active users for our new personal financial management tool MoneyMap versus our previous offering. I also want to mention that our core conversion, initially targeted for the third quarter of this year, has been pushed back to the first part of 2022.

And with that, we’d be happy to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We have our first question from the line of Steven Alexopoulus from J.P. Morgan. Your line is now open.

Steven Alexopoulus — J.P. Morgan — Analyst

Hi, everyone.

Robert Harrison — Chairman, President and Chief Executive Officer

Morning, Steve.

Steven Alexopoulus — J.P. Morgan — Analyst

I wanted to start. So Bob, as we’ve seen other parts of the U.S. reopen, increased sales have been strong in companies, which has been great for deposit growth for banks, but not so much for loan growth. As Hawaii increasingly comes back online, can you walk us through, how this could or really should impact the loan portfolio? And what do we need to see to move up from the low-single digit guidance?

Robert Harrison — Chairman, President and Chief Executive Officer

Yeah, thanks, Steve. That’s a great question. What we have starting to see and this, we talked about, I believe in the — certainly in the last call, maybe the last couple calls is we’re seeing the loan growth on the mainland first and we’re expecting to see the loan growth in Hawaii coming later, and that’s with the exception of residential. Residential has been very strong here in Hawaii as it is in many parts of the country. The challenge there is staying ahead of the run-off.

The commercial real estate construction has been somewhat in Hawaii, as we have a number of projects that are ongoing, and then on the mainland as well. As we look forward, we’re really going to see as Hawaii gets back to work and people are spending more money, we’ve seen the activity numbers on the loan side, we think that there will be recovery in consumer area, credit cards has started, indirect lending will follow when there is a little more cars to purchase. I think that will be the first things that we’ll see and then later on we’ll see the businesses kind of run through these high deposit balances they have and go back to managing their money and doing some borrowing as well. So that will take a little bit a while — a little while after the recovery starts.

Steven Alexopoulus — J.P. Morgan — Analyst

Okay. Yeah. Okay, that’s helpful. Bob, one thing that caught my eye was on the one slide, where you talked about home prices were up over 20% in one of the markets. And I know zoning issues have been tough in Hawaii, right. Locals don’t want to give up more land for development, but just given the price increase, I know you’re involved with some of this. Are there more calls for more supply, which I think would benefit you guys. Is there any traction on that side?

Robert Harrison — Chairman, President and Chief Executive Officer

Yeah, that’s a very complicated topic, because it is in many cities. I think the first things a lot of people are focused on and certainly the county level governments are focused on better managing the Airbnb and Vrbo just because that does take supply out of the local market. I think that’s the first step. Many counties here in Hawaii are very focused on certainly here on Oahu and to a lesser extent on Maui.

But the next thing as you’ve seen a couple of large projects that were approved some time ago, Kapolei and Koa Ridge accelerating their development plans. So, given that the market is so strong, they’re trying to push out ahead. And then lastly, we are also seeing continued interest in high-rise residential condominiums here on Oahu that a number of those projects that have been talked about are moving ahead strongly. So, altogether that helps. Looking at land reform and looking at the way of changing how we have our zoning process for ag to urban, that’s a longer term topic.

Steven Alexopoulus — J.P. Morgan — Analyst

Okay. That sounds good. Maybe final question for Ravi. On the securities book you saw quite a bit of growth again this quarter. I’m curious what’s the yield on what you were able to add in the quarter, and given there’s a bit of a step down in rates, do you have less of an appetite here to continue adding? Thanks.

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Yeah, sort of the new volume rates have been coming in at around 1.20% to 1.40% depending on the duration of the securities we’re buying. I think we were up to about $6.9 billion in balances on the investment securities side. I think it will really depend on what’s available. Certainly, it’s a lever we can use to manage liquidity during this time, but we don’t want to grow the portfolio too much when we feel, as Bob had mentioned earlier in the call that, as loan growth starts to pick up, we want to take advantage of those opportunities and deploy our liquidity towards those loan opportunities. So right now, we feel very comfortable with where we are around $6.9 billion. Maybe it might it might tick up a little bit, but it will really depend on what the environment is like going forward.

Steven Alexopoulus — J.P. Morgan — Analyst

Got it.

Robert Harrison — Chairman, President and Chief Executive Officer

And Steve, maybe a follow on to my earlier answer that a key point I forgot to make is for our dealer flooring, we’re down right about $570 million from the four-year average balance ending 2019 and that’s all supply driven. The amount of capacity and committed lines that is out there hasn’t really changed that much. So as you see a recovery in that product, the manufacturer’s ability to deliver cars, you’ll see a pretty strong recovery, both here in Hawaii and on the mainland in that particular portfolio.

Steven Alexopoulus — J.P. Morgan — Analyst

Got you. I guess the million-dollar question there is do dealers return inventory levels to where they were, which I don’t think anybody knows at this point, but I hear that you that it should get better from where it is. Okay. Thanks for taking my questions.

Robert Harrison — Chairman, President and Chief Executive Officer

Thanks, Steve.

Operator

Thank you. Our next question comes from the line of Jackie Bohlen from KBW. Your line is now open.

Jackie Bohlen — KBW — Analyst

Hi, everyone. Good morning.

Robert Harrison — Chairman, President and Chief Executive Officer

Morning.

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Hi, Jackie.

Jackie Bohlen — KBW — Analyst

Wanted to start with expenses and just get a little bit of background on what drove this shift in the system conversion timing?

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Yeah, maybe a little bit of background on expenses. I think we talked a little bit about the drivers quarter-over-quarter. I think the delay in the core implementation didn’t really change our outlook for 2021 expenses. So we feel pretty comfortable with that 7% guidance that we gave and I think when we look to 2022, we’ll certainly give guidance as we typically do at the end of the year.

Jackie Bohlen — KBW — Analyst

Okay. And was — I guess was there anything — was it internally or externally driven that caused the shift in the conversion timing?

Robert Harrison — Chairman, President and Chief Executive Officer

Jackie, this is Bob. Maybe I can take that. It really is a conversation we’re having with our technology partner and we’re just — we’re cautious and things were a little behind where we had wanted them to be. So we just want to be very sure we can do this successfully and want to give ourselves a little more time. The other issue is we’re just more comfortable doing a conversion in the fourth quarter, but it’s just that fourth quarter brings in a whole bunch of other externalities that we didn’t want to have to worry about.

Jackie Bohlen — KBW — Analyst

Okay, that makes sense. And then just in terms of the employee base and kind of where you sit today versus what you would consider full employment, aside from the [Technical Issues] which I am assuming relates to past announcements, but just wondering where you stand and how any recruitment efforts that you might be having or going just as everything kind of wakes back up?

Robert Harrison — Chairman, President and Chief Executive Officer

Sure, this is Bob again. We didn’t let anybody go as we closed 40% of our branches during COVID. We just redirected them to other areas of the Bank. Having said that, we also didn’t replace people necessarily as normal attrition took place, people moving, retiring etc. So, we’re still out there even though we don’t have huge needs. We’re always out there trying to find the right employees and it’s difficult right now. It’s just a tough environment to do that depending on what job of course. Different jobs have different challenges, but we’ve been moderately successful, but it’s not easy right now. That is a challenge for us and I think everybody in the market.

Jackie Bohlen — KBW — Analyst

Okay. And are your recruitment efforts geared toward any one place in the spectrum, meaning, more entry-level positions versus kind of middle or upper management or is it more broad-based?

Robert Harrison — Chairman, President and Chief Executive Officer

I think it’s probably more entry-level and there are certain specialized areas. Of course, we’re always looking for certain people in the technology area and that’s always a challenge. Anytime we can find someone with that skill set, we tend to grab them right away, but it’s typically more entry-level.

Jackie Bohlen — KBW — Analyst

Okay. Great. Thanks a lot for all the color. I appreciate it.

Robert Harrison — Chairman, President and Chief Executive Officer

Thank you, Jackie.

Operator

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

Ebrahim Poonawala — Bank of America — Analyst

Hey, good morning.

Robert Harrison — Chairman, President and Chief Executive Officer

Morning.

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Morning.

Ebrahim Poonawala — Bank of America — Analyst

I guess just a question on — following up on the dealer finance, we saw another decline. So, I heard your comments earlier, Bob, do you think that balances — those balances have stabilized and do you see any room for any meaningful improvement in the back half of the year or is it all a 2022 event at this point?

Robert Harrison — Chairman, President and Chief Executive Officer

It’s hard to predict. The two factors we talked about — first of all, Eb, congratulations on your promotion. That’s a great news.

Ebrahim Poonawala — Bank of America — Analyst

Thank you.

Robert Harrison — Chairman, President and Chief Executive Officer

And to address the question, the hard part is trying to pick when manufacturing capacity will increase and demand will moderate. So, we haven’t seen either of those come back. Although you’re starting to see the semiconductor issue that’s affecting so many manufacturers, it looks like the semiconductor companies are starting to pivot towards making more chips for cars, which should help in the back half. The question will be, is that going to be enough to keep up with the demand that still seems to be quite strong. What we’re hearing in talking to a whole bunch of our customers or all of our customer is kind of a mix of the conversations between the West Coast and here as they expect to see some return in the back half of the year, but nobody is predicting it gets back to quote normal inventory levels until probably early 2022.

Ebrahim Poonawala — Bank of America — Analyst

Understood. And just in terms of I guess separately on when you think about fee revenue, we’ve seen a fair amount of recovery, I guess, close to pre-pandemic levels. How are you thinking about the outlook for fee revenue activity and customer activity as it impacts fees?

Robert Harrison — Chairman, President and Chief Executive Officer

Yeah, maybe I can start and I hand it off to Ravi. I think the missing piece we’re seeing here and of course it’s — a lot of that’s activity driven which Ravi can speak to, is we don’t have our international traveler back yet, and that won’t be till the end of this year, early next year, primarily Japan, but also Canada and that has been in the past over 20% of our travelers and generally higher spending travelers. So that’s a positive indication for later, but, Ravi, maybe you can address what happening there.

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Eb, this is Ravi. Certainly we saw a nice uptick in credit and debit card fees along with merchant services interchanged. That’s really a reflection of economic activity here. Frankly it’s hard to get a dinner reservation these days in Honolulu. And to the extent that that continues on and we continue to see that level of activity, I think we feel very good about that line item continuing to support our fee income for the rest of the year. Some of the other lines, other service charges we talked about, a number of one-time fees generated by our commercial customers, we typically see that quarter-over-quarter. There are always one-time opportunities for us and we continue to expect to see those types of one-time items over the course of the year.

And trust and investment income has been strong and consistent over the course of the year, and certainly we feel that really will continue to go on. And BOLI we saw a recovery this quarter, primarily due to some investments we have that are mark-to-market in the portfolio. As long as rates stay relatively stable, we feel pretty good about that line too. And swap income had a nice little pickup this quarter. I think that’s a reflection. Hopefully, as we start to see more loan growth on the commercial side, we’ll see swap income continue to rebound from where it was previously. So when you put all those things together, Eb, we feel pretty good about a range of $47 million to $49 million for the next quarter.

Ebrahim Poonawala — Bank of America — Analyst

Got it. Thanks for that color, Ravi. Thank you and thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of David Feaster from Raymond James. Your line is now open.

David Feaster — Raymond James — Analyst

Hey, good morning, everybody.

Robert Harrison — Chairman, President and Chief Executive Officer

Good morning, David.

Ralph Mesick — Vice Chairman and Chief Risk Officer, Risk Management Group

Morning, David.

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Morning, David. Welcome.

David Feaster — Raymond James — Analyst

I appreciate the commentary on the pipeline in the prepared remarks. I just kind of wanted to follow up on that to get a sense of some of the puts and takes with loan growth. I mean, we’ve talked about dealer floor plan, but how have originations trended and how have payoffs and paydowns been a offset to that? And just the composition of the pipeline, is it similarly well balanced to the like we saw the growth in the quarter or were there any segments that you’re seeing notable strength?

Robert Harrison — Chairman, President and Chief Executive Officer

Yeah, a couple of things maybe. This is Bob, David. And maybe I’ll comment and ask Ralph to make a couple of comments. We’re seeing some transitions in our dealer portfolio. Some customers are selling and new customers are buying, and we’ve been fortunate to be able to help them with those transitions. So that and a couple of new customers has led to nice line growth in that area and some loan growth as well. Although, given the depressed level of flooring balances, that’s a opportunity for later, more than it is for today. We’re also seeing some good commercial real estate activity, both here and to a a lesser extent on the West Coast.

So, that is ongoing. And then with that commercial real estate activity is on the construction side, deals that have been in place for some time that are now funding. We’re expecting several of the projects that we’re lending on to finish up later this year. So, this is the part of the construction cycle where they’re actually doing their draws, and before it was more of the equity going in and now it’s actually the bank money finishing the project before they go into sales, but Ralph, anything you want to add to that?

Ralph Mesick — Vice Chairman and Chief Risk Officer, Risk Management Group

No, I think that pretty much sums up the areas that we’re seeing growth.

David Feaster — Raymond James — Analyst

And I just want to follow up on your comments on construction. I was just curious how much of the growth this quarter is drawings on prior commitments versus new deals? And just how do you approach underwriting construction projects in light of the inflationary pressures on both building materials and labor in this environment?

Ralph Mesick — Vice Chairman and Chief Risk Officer, Risk Management Group

Yeah, I think — I think the — what will — what happened, I think earlier this year was some projects got delayed just because of the fact that they were trying to lock down costs. And I think that will work its way through, but that could be a short — in the short run, a little bit of a uplift, but we are seeing loans that we are originating, that we have had originated start to fund, but behind that, we’re also closing new loans. So it looks like we’re going to continue to have that sort of pace.

The one thing that we’re starting to see which is a bit unusual is, there continues to be a more aggressive sort of take out activity. So we would — in the past, we would see situations where we’re doing an apartment loan and we would hold the loan all the way through the stabilization of the project. And then, what started to happen was, we started to see people coming in and paying us off once the project was complete. And now, actually we’re seeing people coming in and looking to refinance before the project’s actually complete. So, that’s pretty — I think it talks to the level of the supply credit that’s out there today.

David Feaster — Raymond James — Analyst

That’s great. And I’d just like to shift gears to the technology. I mean, what do you guys have been doing is pretty impressive. Then you talk a lot about it being this open API structure. I’m just curious how do you think about FinTech and the opportunity to leverage that and play into this? And whether there’s even any partnerships or investments that you guys could make in FinTech and embed that in your platform? Just any thoughts on that front.

Robert Harrison — Chairman, President and Chief Executive Officer

Great question. Dave, that’s something we look at very closely. We certainly are looking to probably partner first and invest at some point in the future. We aren’t quite at that stage yet, but we are very actively looking at ways to partner with different FinTechs and an even quote non-FinTechs but other technology partners to do things that they can do faster, better, and much less expensive than we can.

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

David, this is Ravi, and maybe I’d just add that the open API architecture that we’re building towards, actually gives us a tremendous amount of flexibility and we’re building towards a capability where the types of FinTechs and the products that they have available to us, we’ll be able to partner quickly with them so that we have the best-of-breed — when we have our infrastructure set up, we’ll be able to partner with the best-of-breed FinTechs and work with them closely.

David Feaster — Raymond James — Analyst

That’s great. Thanks guys.

Robert Harrison — Chairman, President and Chief Executive Officer

Thank you.

Ralph Mesick — Vice Chairman and Chief Risk Officer, Risk Management Group

Thank you, David.

Operator

Thank you. Our next question comes from the line of Andrew Liesch from Piper Sandler. Your line is now open.

Andrew Liesch — Piper Sandler — Analyst

Hey, good morning, everyone.

Robert Harrison — Chairman, President and Chief Executive Officer

Morning.

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Morning.

Ralph Mesick — Vice Chairman and Chief Risk Officer, Risk Management Group

Morning.

Andrew Liesch — Piper Sandler — Analyst

Question on the allowance and the negative provision reserved ratio is still above the day one CECL level, but is this now a level where you’re comfortable, where you think you can grow into it at this point or do you think there could be other reserve releases, at some point down the line?

Ralph Mesick — Vice Chairman and Chief Risk Officer, Risk Management Group

Well, this is Ralph, Andrew. I think we’re going to have to see the rebound that we have that’s happening today which is much better than we would have anticipated as sustainable. And then I think how that translates into performance for our business customers and households will be important to evaluate over the next couple of quarters. We know the variant is starting to have — we’re seeing a higher infection rate. So we have to kind of see what happens there. And I think finally, we want to know how — what happens once we see the stimulus and the relief programs go away is, if our consumers continue to hold up. So I think it’s kind of hard to say right now, but that was a pretty, pretty big release and I think it’s reflective of how quickly the economy has rebounded here and the outlook’s improving.

Andrew Liesch — Piper Sandler — Analyst

Got it. Okay, thank you. And then, Ravi, I think you said excluding the impact of excess liquidity and the PPP forgiveness, you expect — looking for the margin to be down 3 basis points to 5 basis points. On that liquidity front, I mean I know it’s still somewhat early in the quarter, but what have you seen so far? Is there any — has that been alleviated at all or what flows are you seeing there?

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Yeah, I mean, I think over the course of the quarter, we mentioned commercial and consumer deposits were up quarter-over-quarter. To the extent that we see PPP loan forgiveness continue sort of at a pretty good clip, some of that money is going to flow back onto our balance sheet in the form of liquidity. And so — and I think it’s a little early to say where liquidity levels are going to go, but certainly as we mentioned before, we have quite a bit of capital. We have plenty of room on the balance sheet for loan growth and when we see those opportunities come, well, we’re going to be able to take advantage of it.

Andrew Liesch — Piper Sandler — Analyst

Got it. Okay. Thanks for taking the questions.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Jared Shaw from Wells Fargo. Your line is now open.

Jared Shaw — Wells Fargo — Analyst

Hi, good morning everyone.

Robert Harrison — Chairman, President and Chief Executive Officer

Morning.

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Morning.

Jared Shaw — Wells Fargo — Analyst

Thanks for the opportunity to ask a question. I guess with the loan growth, I mean in the sort of persistent headwinds from flooring, any change in your appetite to retain or book more residential loans, maybe beyond what we saw this quarter, but as a percentage of the loan book for a longer period of time?

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

I think it will be a reflection of what we see sort of in the marketplace. The marketplace is, I think, slowly starting to move towards more of a purchase market. And as that market moves from — shifts from purchase and refi, we’ll see the reflection on the balance sheet of either retaining more loans or selling out. Certainly, the bump here, a $106 million quarter-over-quarter in residential was good for us and we like those loans. We like the quality of those loans. And when we feel it’s appropriate, we’d like to put those on the balance sheet.

Robert Harrison — Chairman, President and Chief Executive Officer

And this is Bob, Jared. Just to add to that, given where pricing is at, your — the average price of a home is quickly moving out of Freddie and Fannie category here in Hawaii. And so, a lot of the new loan origination is not able to be sold, at least Freddie or Fannie.

Jared Shaw — Wells Fargo — Analyst

Okay, that’s great. And then on expenses, I guess, first looking back into your full year guidance, that sort of assumes dollars of expenses stay relatively flat from where we are here even with some of those items that were called out. As we look with the move of the timing of the core conversion, were there any expenses associated with delaying that, that are in ’21 or will the expense — sort of the main expense of that conversion move now from ’21 to ’22?

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

I think it’s sort of a — there’s a lot of different moving parts there. Certainly, some of it is going to shift into 2021. But we, for example, in our training program and the costs associated with training our frontline staff sort of stretched out a little bit more. And so, that’s one impact. Certainly, that’s a benefit to us here, but it will have to spend that money at some point in time. On the flip side, we’re extending some of the relationship, existing relationships with technology providers to get across the finish line next year. And so, there’s going to be a lot of puts and takes on it. We feel pretty good about our guidance still intact for 2021 and we feel that overall when we look at these puts and takes, really doesn’t have a material impact this year.

Jared Shaw — Wells Fargo — Analyst

Okay. And do you have a date set for the conversion or is that still to be determined?

Robert Harrison — Chairman, President and Chief Executive Officer

Yeah, we’re still working on that with our technology partner, but looking for Q1 of 2022, if everything works out well.

Jared Shaw — Wells Fargo — Analyst

Okay. Thank you.

Operator

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

Laurie Hunsicker — Compass Point — Analyst

Great. Hi, thanks. Good morning.

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Morning.

Robert Harrison — Chairman, President and Chief Executive Officer

Morning.

Ralph Mesick — Vice Chairman and Chief Risk Officer, Risk Management Group

Morning, Laurie.

Laurie Hunsicker — Compass Point — Analyst

Just wondered your credit is looking pristine. Deferrals, didn’t see any deferral numbers. I know your deferrals last quarter were very, very low at $81 million. Can you just give us an update on where we are with deferrals?

Ralph Mesick — Vice Chairman and Chief Risk Officer, Risk Management Group

Sure, Laurie. This is Ralph. Right now, we’re at $35 million in deferrals. And of that, I think it’s about $21 million is residential mortgages. So, that’s down from I think $2.4 billion is what we sort of have on the books of loans that were — had been granted deferrals last year.

Laurie Hunsicker — Compass Point — Analyst

Great. Fabulous. That’s helpful. And then just wondered if we could go back on the PPP loans. Appreciate all the detail. The $23 million that’s the remaining unamortized piece of PPP, how much of that round one or how should we think about the pace of that forgiveness as the majority of that $23 million potentially forgiven in the back half of this year, how should we be thinking about that?

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Laurie, this is Ravi. It’s a little hard to say when we think it’s going to be coming up. I think round one, the balances related to that are round two — $2 million and we had quote unquote a round two which came sort of really in partnership with round one. It’s really low. And then — so, the bulk of it really came in the latest round in Q1. And so, to the extent that we get the forgiveness pipeline going, which is what we did in the start of Q2, as we shifted our attention to helping our customers go through the forgiveness process, it will just take time and we’ll just have to see how it plays out.

Robert Harrison — Chairman, President and Chief Executive Officer

And Laurie, this is Bob. Just to add to Ravi’s answer a bit, what we’re doing is carrying a bar billing because the easy forgiveness is $150,000 and under. We’ve been very engaged with those customers. And then, the very large — the larger loans which have more sophisticated CFOs, the accounting staff, been easier to work with them and now we’re kind of in the group in the middle. So it’s taking a little bit more hand holding and we’re just going to have to work through that with the customers.

Laurie Hunsicker — Compass Point — Analyst

Got it. Okay. Super helpful. And then just one last question. As we put all of that together and we look past PPP, we’re kind of three quarters out or whatever the number is, and there’s still obviously some challenges on margin. If our core margin is running at 2.35%, is that the right way to be thinking about this or is there a better guide you can give us on that?

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

I think it will depend on a number of different factors. I think it all depend on what we see with respect to the loan portfolio, our appetite for investment securities and deploying some of that liquidity going forward and just general levels of liquidity. So, it’s probably a good number to start from, but from there, it’s — things could change, go up or down depending on what we see.

Laurie Hunsicker — Compass Point — Analyst

Great. Thank you. Helpful. Thanks for taking my questions.

Robert Harrison — Chairman, President and Chief Executive Officer

Thank you, Laurie.

Ralph Mesick — Vice Chairman and Chief Risk Officer, Risk Management Group

Thanks.

Operator

Thank you. Our next question comes from the line of Jackie Bohlen. Your line is now open.

Jackie Bohlen — KBW — Analyst

Hi, thanks for taking my follow-up. I just wanted a refresher on capital targets and ratios. I know the ratios didn’t really change much quarter-to-quarter, but I feel like the economy is rapidly evolving. And so, just an update on how you think about the capital ratios you’re targeting? And if that was — if the quarter’s pace of repurchases, was a pretty indicative level.

Robert Harrison — Chairman, President and Chief Executive Officer

Jackie, this is Bob. Maybe I’ll start and hand it over to Ravi. We haven’t changed any of our targets. We’re still looking at common equity Tier 1 at 12%. And so, we’re still well above that as you can tell. As Ralph had mentioned, it’s a little hard to predict as far as where the credit quality, will it continue at this level or there’ll be challenges as the stimulus kind of wears off and various other things. And then lastly, we’d love to see that capital being used to support loan growth and that’s a little bit early to figure that out, but, Ravi, anything to add?

Ravi Mallela — Executive Vice President and Chief Financial Officer, Finance Group

Jackie, I’d just add that I think we mentioned during the call that we did about $22.4 million in share repurchases in the quarter. We think that’s a pretty good pace for the quarter and kind of puts us in line with the $75 million of share repurchases that we are authorized to do in the year. And so given where capital levels are, we feel confident about kind of moving through that consistently over the course of the year.

Jackie Bohlen — KBW — Analyst

Okay, great. Thank you for all the background.

Robert Harrison — Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. And I would now like to turn the conference over back to Mr. Kevin Haseyama.

Kevin Haseyama — Strategic Planning & Investor Relations Manager

Ann, I think we have one more question from Brock Vandervliet in the queue.

Operator

Oh, okay, sir. Sorry about that. So we have one more question from Brock Vandervliet from UBS. Your line is now open.

Sean — UBS — Analyst

Good morning. This is Sean [Phonetic] on for Brock. Going back to how credit’s been clean in recovery, what should we think about in terms of the NCO profile next couple of quarters?

Ralph Mesick — Vice Chairman and Chief Risk Officer, Risk Management Group

Yeah. The NPA profile, is that what you said, Sean?

Sean — UBS — Analyst

The NCO.

Ralph Mesick — Vice Chairman and Chief Risk Officer, Risk Management Group

NCO profile. Yeah, this is, Ralph. I think you know as we thought through this going in, we would have anticipated taking provisions and seeing those provisions eventually sort of flow to losses. You look at where the level of NPAs are today, they’re are very low. So I mean at this point, if that trend continues, we’re in really — we’re not going to see a lot of losses this year, not to the extent that we saw.

But as I said, we have to kind of see how strong this recovery is and what happens with our consumers and households once the stimulus programs go away. So we would — we’re prepared to take quite a bit of loss in the provision today. I think if you look at about 138 basis points net of PPP, that’s fairly large. It’s something that would be indicative of something that is more of a recessionary sort of level of provisioning.

Sean — UBS — Analyst

Great. That’s helpful. Thanks for taking my question.

Robert Harrison — Chairman, President and Chief Executive Officer

Thanks, Sean.

Operator

Thank you. And now, I will turn the call over back to Mr. Kevin Haseyama.

Kevin Haseyama — Strategic Planning & Investor Relations Manager

Thanks, everyone, for joining us today. We appreciate your interest in First Hawaiian and please feel free to contact me if you have any additional questions. With that enjoy the rest of your day and have a good weekend.

Operator

[Operator Closing Remarks]

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