Jan 23, 2012
Executives
Cindy Wyrick – EVP, IR Peter S. Ho – Chairman, President and CEO Kent T.
Lucien – Vice Chairman and CFO Mary E. Sellers – Vice Chairman and Chief Risk Officer
Analysts
Aaron Deer – Sandler O'Neill Jeffrey Rulis – D.A. Davidson Craig Siegenthaler – Credit Suisse Brett Rabatin – Sterne Agee Joe Morford – RBC Brian Zabora – Stifel Nicolaus Casey Haire – Jeffries & Company Jacquelynne Chimera – KBW Russell Gunther – Bank of America Merrill Lynch Bryce Rowe – Robert W.
Baird & Company
Operator
Good day ladies and gentlemen and welcome to the Fourth Quarter 2011 Bank of Hawaii Corporation's Earnings Conference Call. My name is Chris, and I will be your conference moderator for today.
Presently, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session.
(Operator instructions). At this time, I would now like to turn the conference over to your presenter for today, Ms.
Cindy Wyrick, Director of Investor Relations. Ma'am, you may proceed.
Cindy Wyrick
Thank you, Chris. Good morning everyone and thank you for joining us as we review our financial results for the fourth quarter of 2011.
Joining me this morning is our Chairman, President and CEO, Peter Ho; Vice Chairman and Chief Financial Officer, Kent Lucien; and our Vice Chairman and Chief Risk Officer, Mary Sellers. Our comments today will refer to the financial information included in the earnings announcement this morning.
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. And now, I'd like to turn the call over to Peter Ho.
Peter Ho
Thanks, Cindy. Good morning or good afternoon everyone.
We certainly appreciate your interest in listening in today. I’m going to provide you with some general comments to begin and then I'll turn the call over to Kent, who'll provide color on the quarter's financials.
As customary, we'll then provide an update on risk for the quarter and I'll finish up with some concluding thoughts and then certainly we'll be delighted to answer whatever questions you might have. Bank of Hawaii posted solid results for the fourth quarter of 2011.
Despite continued revenue headwinds confronting the industry, Bank of Hawaii was able to generate fully diluted earnings per share modestly ahead of fourth quarter 2010 levels. Loans were up nicely in the quarter in almost all categories.
Average core deposits were up meaningfully in both our consumer and commercial businesses. The number of demand accounts grew 10% and 4% respectively in our consumer and commercial businesses in 2011.
Our credit capital and liquidity positions remained strong and our hallmark of our franchise. And now let me turn the call over to Kent.
Kent?
Kent Lucien
Thank you, Peter. Good morning.
Net income for the fourth quarter was $39.2 million or $0.85 per share, compared to $43.3 million or $0.92 per share in the third quarter and $40.6 million or $0.84 per share in the fourth quarter of 2010. The return on assets in the fourth quarter was 1.17%, and return on equity was 15.2%.
We reduced our share count by 1.3% in the fourth quarter and by 4% for the full year. Year-to-date, net income was $160 million or $3.39 per share compared to $183.9 million or $3.80 per share in 2010.
We realized $6.4 million in securities gains this year, compared to $42.8 million last year. Year-to-date, return on assets was 1.22%, and return on equity was 15.7%.
Our net interest margin in the fourth quarter was 3.04% compared to 3.09% in the third quarter and 3.15% in the fourth quarter of 2010. Year-to-date, net interest margin was 3.13% compared to 3.41% last year.
The lower margin is due mainly to the lower interest rate environment. The credit provision in the fourth quarter was $2.2 million, the same as the third quarter, and was $5.3 million in the fourth quarter of 2010.
The credit provision for the fourth quarter of 2011 included net charge-offs of $7 million and a $4.8 million decrease to the allowance. The credit provision for the third quarter included net charge-offs of $3.7 million, and a $1.6 million decrease to the allowance.
The credit provision equaled net charge-offs for the fourth quarter of 2010. Our allowance for loan and lease losses at the end of the fourth quarter was $138.6 million or 2.5% of outstanding loan and leases.
Non-performing assets were $40.8 million at the end of the fourth quarter, up $3 million from the third quarter, and down $3 million from the end of the fourth quarter of 2010. Included in non-performing loans are $25.3 million in residential mortgage loans as of the end of the year.
Non-interest income for the fourth quarter was $43.4 million compared to $50.9 million in the third quarter, and $51.5 million in the fourth quarter of 2010. The decrease was primarily due to lower debit interchange revenue as a result of the Durbin Amendment, and a decrease in mortgage banking income.
We retained $34 million in salable residential mortgages in the fourth quarter and thus maintained an overall ratio of 40% of residential mortgages to total loans. Year-to-date non-interest income was $197.7 million compared to $255.3 million in 2010.
The decrease was primarily due to a $36.5 million decrease in securities gains, lower overdraft fees and debit interchange income. Non-interest expense totaled $84.4 million in the fourth quarter, compared to $84 million in the third quarter, and $88.7 million in the fourth quarter of 2010.
The decrease from last year was primarily due to a $1.2 million accrual for a personal computer refresh program and a $1 million contribution made to the Bank of Hawaii Foundation, both in the fourth quarter of 2010. Year-to-date non-interest expense was $348.2 million compared to $346.2 million in 2010.
In 2011, we had a $9 million legal settlement expense associated with overdraft litigation. We continue to be focused on achieving expense efficiency and during the fourth quarter, we announced the consolidation of four branches in our system.
The effective income tax rate was 26.1% in the fourth quarter compared to 29.6% in the third quarter and 24.5% in the fourth quarter of 2010. The lower rate compared to the third quarter was primarily due to the closure of three tax years and the release of reserves for uncertain tax items.
The year-to-date effective tax rate was 29.5% compared to 29.3% in 2010. Our investment portfolio now stands at $7.1 billion and we have unrealized gains in the portfolio of $161 million.
We repositioned at fair value approximately $950 million in the available-for-sale investment securities to the held-to-maturity category during the fourth quarter. We continue to invest on a conservative basis and increased our investment in state and municipal securities this quarter.
The average duration of the AFS portfolio is 2.22 years. Loans were $5.5 billion at the end of the fourth quarter, up $190 billion or 3.6% compared to the end of the third quarter, and up $203 million from the end of the fourth quarter of 2010.
Deposits were $10.6 billion at the end of the fourth quarter, up $584 million or 5.8% compared to the end of the third quarter, and up $704 million from the end of the fourth quarter of 2010. Our wholesale funding with government entities remained at $1.3 billion in the fourth quarter and our average cost of public repurchase agreements is 7 basis points.
Our shareholders' equity was $1 billion at year-end. We paid out $20.8 million in dividends in the fourth quarter and we continued our share repurchase program in the fourth quarter, repurchasing 702,000 shares of common stock at an average cost of $41.44 per share or a total of $29.1 million.
We have remaining share repurchase authority of $74 million as of year-end. Last Friday, our Board declared a dividend at $0.45 per share for the fourth quarter.
Our capital position remained strong and at the end of the fourth quarter, our TCE to risk-weighted assets was 17.9%. Now, I'll turn the call over to Mary Sellers.
Mary Sellers
Thank you, Kent. Net charge-offs for the fourth quarter totaled $7 million, up $3.3 million on a linked quarter basis and $1.7 million year-over-year.
The linked period increase was primarily due to a $2.4 million increase in residential and home equity net charge-offs. For the full year, net charge-offs were $21.4 million, down $30.1 million year-over-year.
Non-performing assets totaled $40.8 million, up $3 million from the third quarter as well as year-over-year. The linked period increase was largely due to the addition of a $2.1 million commercial construction loan for a residential project on the neighbor islands.
Residential mortgage non-accrual loans totaled $25.3 million at quarter end. The level of non-performing assets will continue to be impacted in the near-term due to the longer resolution timeframe for residential assets.
At quarter end, loans past due 90 days or more and still accruing interest totaled $9.2 million, down $1.6 million on a linked quarter basis, and up $1.6 million year-over-year. The linked period decrease was due to a $1.2 million decrease in residential mortgage and up $445,000 decrease in home equity.
Restructured loans not included in non-accrual loans or loans past due 90 days more, totaled $33.7 million at quarter end, up $563,000 from the prior quarter. Residential mortgage loan modified to assist our customers in retaining their homes accounted for $22.3 million of the total.
Consistent with the gradually improving Hawaii economy, we continue to see improvement on a linked quarter and year-over-year basis, in what we consider to be the higher risk segments of the portfolio. Our land loan portfolio totaled $18.2 million at the end of the fourth quarter, down $122,000 on a linked quarter basis and $5.6 million year-over-year.
As we've previously shared in our residential mortgage and home equity portfolios, we consider loans originated after 2004, with current credit monitoring scores less than 600 and loan-to-value ratios greater than 70%, to be of higher risk. At the end of the quarter, higher risk exposure in our residential mortgage portfolio totaled $18.5 million, down $1.8 million on a linked quarter basis, as well as year-over-year.
In our home equity portfolio, higher risk exposure totaled $21.4 million, down $908,000 on a linked quarter basis, and down $1.8 million year-over-year. At the end of the fourth quarter, residential mortgage loans delinquent 30 to 89 days totaled $18.1 million, down $3.3 million on a linked quarter basis and up $702,000 year-over-year.
Home equity lines and loans delinquent 30 to 89 days totaled $8 million, which is flat on a linked quarter basis and up $1.3 million year-over-year. Commercial construction loans totaled $98.7 million at the end of the quarter, up $29 million on a linked quarter basis and $18.3 million year-over-year, driven off the funding of a low-income senior rental project on Oahu.
Residential homebuilding exposure totaled $29 million at quarter end with higher risk exposure of $13.5 million, down $1.9 million from the third quarter and down $1.5 million year-over-year. For the fourth quarter, the provision for loan and lease losses was $2.2 million, which given net charge-offs of $7 million, reduced the allowance by $4.8 million to $138.6 million or 2.5% of outstanding loans and leases.
Absent significant deterioration in the economy and assuming continued improvement and/or stability in credit quality, we anticipate that we'll require a lower level of allowance going forward. I'll now turn the call back to Peter.
Peter Ho
Great, thanks, Mary. Economic conditions in Hawaii remain stable.
Our key visitor segment continued to perform well. For the first 11 months of 2011, visitor arrivals were up 3.4%.
Total visitor days were up 4.9%, and perhaps most importantly, total visitor spend was up 15%. 55% of that spending increase came from international markets, including Japan, Australia, Korea, New Zealand, and China.
The Asia Pacific and Oceanic markets are growing in importance to us, comprising 41% of overall spend year-to-date versus 37% last year. President Obama's recent executive order aimed at increasing international tourism to the United States may have a meaningful impact on our markets in the coming days.
Unemployment levels in Hawaii remain below that of the U.S. as a whole.
Residential real estate values remain stable. While residential sales activity has been somewhat lackluster, I would note that single family inventory levels are now below five months.
In short, we remain cautiously optimistic in the near-term economic prospects for island markets. And now we'd be happy to address your questions.
Operator
Thank you. (Operator instructions).
And our first question comes from the line of Aaron Deer of Sandler O'Neill and Partners. You may proceed.
Aaron Deer – Sandler O'Neill
Hi. Good morning everyone.
Congratulations on the very strong loan growth you had in the quarter. I've got a question and Mary you might have mentioned this, but I was having a hard time keeping up with your comments.
Of the construction growth that you showed in the quarter, how much of that was commercial versus residential?
Mary Sellers
We had – it all came primarily from a low income senior rental project on Oahu.
Aaron Deer – Sandler O'Neill
Okay. And given the growth that you've been showing in the overall portfolio, I'm just kind of curious what your outlook is for 2011, if this is a sustainable pace or if it just had a lot of originations that happen to be completed in the fourth quarter and I guess how the pipeline is shaping up looking ahead?
Peter Ho
Yeah. Okay.
So outlook for 2012, Aaron, is – our commercial growth has been pretty strong for a few quarters now. I guess if I were to handicap it, I would say that we had a pretty good size bulge into the fourth quarter pipeline-wise, but we anticipate pretty good activity in the commercial business in '12.
The consumer book is something that, I think as you know, we've been working on for a while now and going into the teeth of the last credit downturn, we really pulled back on our consumer businesses and products and have been working really for the past year to get that business wound up again. So I was most pleased to see growth, albeit pretty nominal, in the consumer business for Q4 and our hope is that we've got those products up and running again.
What in-fills from that is our residential mortgage book and Kent alluded a little bit to the proportionality that we're trying to get there. Basically, our commercial and consumer and resi book is 40% commercial, 40% residential, 20% consumer.
So as we get growth in consumer and commercial, we generally like to bring up our residential exposure to keep those proportions in place. So overall, I think we're hopeful of reasonable balance.
We're hopeful of reasonable growth in '12. Of course that's going to be dependent on a continued healthy outlook here economically in this market.
Aaron Deer – Sandler O'Neill
All right. And then just one more if I may and I'll step back.
With a strong balance sheet growth that you had and you've obviously been very active with your share repurchases, I’m just curious if you can tell us, where you're comfortable letting your capital ratios go to and if there's one ratio in particular that we should be focused on as may be a target level?
Kent Lucien
Yeah. As I’ve mentioned in previous calls, we take a multidimensional view on capital management and so we're looking not only at ratios, we're looking at the economy, we're looking at credit, we're looking at our own capital generation capability.
So I don't want to point you to any particular ratio other than to say that we look at it from a lot of different viewpoints and we really do it a quarter at a time. So we look at these factors each quarter in deciding the dimension of repurchase activity.
Aaron Deer – Sandler O'Neill
Okay. Thank you.
Operator
Our next question comes from the line of Jeff Rulis of D.A. Davidson.
You may proceed.
Jeffrey Rulis – D.A. Davidson
Good morning. I had a question on the time deposits and just kind of thinking about the margin.
Is there any level of time deposits I guess maturing in the next few quarters, if you've got those by buckets?
Peter Ho
To be honest, I’m not sure we have a whole lot of strategy around our time deposit pricing. It really is a somewhat junior portion of our overall deposit base and frankly strategy and given the liquidity that we have or given the growth we’ve had on the core deposit side, we frankly have been letting those time deposits come down quarter-to-quarter.
Really, I think our focus there is to have a product available to our consumer base, our consumer customers to the extent that they want that kind of product, if they are for them, but we really don't have a growth strategy or targeted strategy around that particular bucket.
Jeffrey Rulis – D.A. Davidson
Okay, Peter, I guess put another way, I was just trying to get to – given your cost of funds on a relative basis is pretty low. I guess maybe comment on your confidence of how much lower you could lower the cost of funds?
Peter Ho
Not much lower. Yeah.
I think we are approaching the ground here.
Jeffrey Rulis – D.A. Davidson
Got it.
Operator
And our next question comes from the line of Craig Siegenthaler of Credit Suisse. You may proceed.
Craig Siegenthaler – Credit Suisse
Thanks guys. Hope you’re all doing well.
First, just on the securities portfolio, I know the size is really dependant on future loan and deposit growth, but can you talk about your plans in terms of how this $7.2 billion portfolio really could change over the next couple quarters here?
Kent Lucien
Well, as you mentioned, it's somewhat dependant on the other factors, but other than putting a little bit more emphasis on municipal securities, I wouldn't anticipate much of a change in the composition. Again, the size may vary a little bit.
The overall size may vary a little bit depending on loan growth and deposit growth, but the composition and the strategy, other than the municipal securities, is pretty much steady as she goes.
Craig Siegenthaler – Credit Suisse
And what is your new money yield tax effective on the municipal securities? And also should we think about all new securities acquisitions going into the held-to-maturity bucket and not the available-for-sale bucket?
Kent Lucien
Well, as to your latter point, we're really trying to keep a pretty even balance between the two buckets, AFS and held-to-maturity. On the yield, the recent examples, and it's really dependant on the market at the time, but into the fourth quarter we were adding municipal securities at a tax effective yield of about 2.78%, but as I said, that can change as market conditions change.
And overall, into the fourth quarter, we were adding into the portfolio at an average of 2.37% and the runoff was at 2.52%.
Craig Siegenthaler – Credit Suisse
Okay. So just in conclusion, it sounds like excess deposit growth over loan growth will go into the securities portfolio at a 50-50 mix roughly into the available-for-sale and held-to-maturity?
Kent Lucien
Generally, yes.
Craig Siegenthaler – Credit Suisse
Okay. All right, great.
Thanks for taking my questions.
Operator
Our next question comes from the line of Brett Rabatin of Sterne Agee. You may proceed.
Brett Rabatin – Sterne Agee
Hello everyone. Wanted to ask, first a follow-up question on the capital issue, just the share repurchases I saw slowed after year-end.
Can you give us some thoughts on the buy-back pace going forward, particularly if deposit growth continues to be pretty solid?
Kent Lucien
I wouldn't get too excited about the activity after year-end. As you know, we have to basically designate the pricing and the quantity rules well in advance of the end of the quarter.
So it really doesn't reflect any particular judgment or it doesn't really mean that much for that short period of time. So I mean as to the overall capital program, I think I discussed it earlier, we still think it's valuable to the shareholders.
We still think it's important and accretive, but as I also mentioned, we'll take it one quarter at a time.
Brett Rabatin – Sterne Agee
Okay. And the other thing I want to ask is around just fee income, a lot of banks that have the Durbin headwind are looking at a lot of initiatives to try and replace the fee income and I was just curious, I know you guys have gone through a process of thinking about fees and how to go about that in a proper fashion.
I was curious for maybe some color around your thoughts on that in 2012 and then just the 4Q pace of fee income. Is that a level to build off of or is that the run rate?
Peter Ho
Yeah. Brad, this is Peter.
I think that for a good portion of last year there was a fair amount of sentiment that adding fees into the overall pricing mix of core checking accounts would be something that could help offset the loss of fees in other areas. As you know, that's really not the path that we've followed.
So where we are is we're focused on building back profitability in ways other than simply up pricing the same product. And so we're focused on where can we find more profitable customers, where can we retain or how do we retain the profitable customers that we already have?
So it's a little bit more of a volume game for us. I guess the other thing that I would add in there is, as Kent mentioned, we're looking at the overall cost structure of the delivery system against kind of the new base profitability of the products and there I think we’ve got some opportunity to improve efficiency hopefully, and importantly, while not impairing the overall experience for our customer base.
That’s the angle we are taking.
Brett Rabatin – Sterne Agee
Okay, great. Thanks for color.
Operator
Our next question comes from the line of Joe Morford of RBC. You may proceed.
Joe Morford – RBC
Thanks. Good morning everyone.
First, it’s really just a follow-up to your comments to Aaron’s question. So are we to take the growth in residential mortgage this quarter as more of a kind of one-time true-up to maintain that percentage, and thus all else being equal, should mortgage banking revenues pick up again going forward and then you just adjust that, again, that portfolio mix based on growth in other categories eventually?
Peter Ho
Let me change your presumption a little bit. We did retain mortgages into the fourth quarter that were otherwise saleable.
That will probably continue somewhat into the first quarter. Again, we are trying to keep an even balance in resi mortgage with the rest of the loan portfolio.
To the extent we have other growth attributes in the loan portfolio, we need to keep the resi Mortgage in line with that. So we may see some additional retention in at least the first quarter.
It may continue a little bit into the second quarter as well.
Joe Morford – RBC
Okay. And then second, just more broadly, any thoughts on your ability to continue to hold net interest income flat or could we possibly even see some growth here in 2012?
Peter Ho
Well, growing loans is really the first step to maintaining the margin and so that's key for us. Adding municipal securities into the investment portfolio, that's another way for us to garner a little bit higher yield, but after that it's pretty much environmental.
So what happens in the interest rate environment is to a very large degree going to determine the outcome.
Joe Morford – RBC
Okay. All right, thanks so much.
Operator
Our next question comes from the line of Brian Zabora of Stifel Nicolaus. You may proceed.
Brian Zabora – Stifel Nicolaus
Yes. Good morning.
A question on your deposits. A lot of the growth this quarter was public and other.
Just want to see if you had any sense of how sticky that may be, or could – was that year-end related?
Peter Ho
It was really as a result of liquidity coming into the state coffers as a result of some capital markets activity. So the timing of that is a bit uncertain.
We have some of that layered out on a time – in a time structure. So there was good activity on the institutional side in Q4.
There was also good activity on our core consumer and business segments as well. Core deposits and consumer were up just about 2%.
Average core deposit and consumer were up just about 2% and average core deposits in our business lines were up 1.7%. So we did see strong growth in the institutional side.
We also saw very good growth in our key business and consumer lines as well, Brian.
Brian Zabora – Stifel Nicolaus
Does that indicate maybe the size of the balance sheet depending on how strictly those public – excluding the other strong deposits elsewhere, but if the public deposits run-off, can we see the balance sheet shrink a little bit maybe in the next quarter or so? Is it tough to predict?
Peter Ho
It's possible it might decrease slightly, but hard to know.
Brian Zabora – Stifel Nicolaus
Okay. And then just lastly, could you talk a little bit about loan pricing?
Obviously we talked about the good growth. Some of the loan yields were down a bit from third quarter.
So, I just wanted to see how that is – the balance between growth and pricing.
Peter Ho
Well, I think we're trying very hard to maintain pricing discipline. Having said that, there is a good premium on loans versus investments and we're not the only bank in town that's figured that out.
So it's a pretty competitive environment, but we run everything, as you know, as return on capital. So we'll make lending decisions and pricing decisions if it makes sense for us from a return standpoint.
That's really kind of the core of how we decisions things, but I would add that it's getting pretty competitive out there.
Brian Zabora – Stifel Nicolaus
Thanks for taking my questions.
Operator
Our next question comes from the line of Casey Haire of Jeffries. You may proceed.
Casey Haire – Jeffries & Company
Oh, hey. Thanks.
Good morning guys. So just to follow up on some of the loan yield questions.
So the commercial mortgage yield, that had been pretty stable, it took a pretty big hit this quarter. Was that more just pricing pressure or was that a lack of prepaid penalties in the fourth quarter?
Peter Ho
I'm not sure about the prepaid side. I would say though that there's been a good amount of growth in the commercial mortgage portfolio in general from quarter to quarter to quarter, and obviously the yield environments come down over the past, the most past year or so.
So I think that's a lot of what you're seeing in the yield.
Casey Haire – Jeffries & Company
Okay. And then within the securities book, the held-to-maturity bucket took a pretty big hit.
Was that – was a lot of that premium amortization that we may get a snapback in first quarter?
Kent Lucien
Well, it's the same factors that we've been talking about. It's the fact that we're – the run-off is at a higher yield than the repurchase.
(inaudible) factor.
Casey Haire – Jeffries & Company
So nothing accelerated just due to premium amortization then?
Kent Lucien
No.
Casey Haire – Jeffries & Company
Okay. And then just switching quickly to expenses, with a 60% efficiency ratio, obviously FIN, Reg E and overdraft is having profitability.
Just was curious as you look out, you consolidated some branches. As you look ahead to 2012 in a still tough revenue environment, where do you think you can live below that 60% level?
Kent Lucien
Well, reducing expenses on an absolute basis is important to us. The ratio as I've I think pointed out in the past is a function of the income, but certainly we are on the course of becoming even more efficient and reducing the overall level of expenses and even in 2011 when you subtract the legal settlement, which was $9 million for a year, we did accomplish about a 2% reduction in total expenses in '11.
So in this environment, it’s critical for us to do that, consolidating four branches as I mentioned is a step in that direction.
Casey Haire – Jeffries & Company
Okay. Thanks for taking my questions.
Operator
Our next question comes from the line of Jackie Chimera of KBW. You may proceed.
Jacquelynne Chimera – KBW
Hi. Good morning everyone.
Just had a question on the C&I portfolio. I have in my notes that at the end of the last quarter there were some pay downs right at the end and that the average balances were higher.
Looking to the growth in the fourth quarter, did that have any effect on it?
Peter Ho
C&I was down average – on average about 2%.
Jacquelynne Chimera – KBW
In the fourth quarter?
Peter Ho
In the fourth quarter, right.
Jacquelynne Chimera – KBW
So was it a run up on lines at the end of the quarter then? So kind of opposite of what happened in the third quarter?
Peter Ho
Well, I think what happened in the – I think when we're comparing quarter-on-quarter on a linked basis; the fact that we lost some outstandings late in the third quarter had a dilutive impact on our average comparison for the fourth quarter, because we’re starting out at the lower base at the beginning of the fourth quarter.
Jacquelynne Chimera – KBW
Okay. Versus – okay.
Peter Ho
Yeah, right. And then – and I will say that we just had some pay downs on existing lines, just people having extra liquidity towards year-end and just applied it to their loans rather than holding it as cash.
Jacquelynne Chimera – KBW
So was most of the growth in the quarter from new customers then?
Peter Ho
On the C&I side, I think it was just kind of existing customers flowing in and out.
Jacquelynne Chimera – KBW
Okay.
Operator
Our next question comes from the line of Russell Gunther of Bank of America Merrill Lynch. You may proceed.
Russell Gunther – Bank of America Merrill Lynch
Hi. Good morning everybody.
I just wanted to circle back up on the non-interest expense side in line of the comments on reducing expenses on an absolute basis and the branch closures that were announced. If we look at the fourth quarter, clean quarter, didn't look like any one-timers in there at all.
Is the thought in terms of magnitude that you could be able to reduce the expense base off of this – off of an annualized 4Q '11?
Peter Ho
Well, the fourth quarter is hard to extrapolate from just that one period. As I mentioned earlier, the full year expenses were down about 2%.
I'm not going to either promise or forecast that kind of result into '12, but directionally that's the kind of result we're looking for.
Russell Gunther – Bank of America Merrill Lynch
Okay, that’s helpful. And then just with regard to loan growth on the commercial side, any key or big new hires that are going to help you be able to continue to take share and maybe see this type of loan growth going forward?
Peter Ho
Well, the growth in our commercial mortgage book in 2011 was in fact as a result of some key and very successful hires that we brought in a while back. I'd say moving forward we're looking to grow the book.
It may be a little bit more muted especially in the commercial mortgage side simply because we had some success late and secondly because the area of emphasis that we're moving towards is more to the down market, smaller middle market segment. I'm talking $1 million, $2 million size mortgages.
So a nice business, a nice portfolio of loans, but it just takes an awful lot of those to create meaningful growth in any particular quarter. So we have brought in, I want to say, upwards of 10 folks to staff that particular segment of the market.
I think it's going to be very good for us longer-term, but it's going to take a while to ramp up.
Russell Gunther – Bank of America Merrill Lynch
All right. And then – thank you for that.
Maybe bigger picture question on the fee income side, any appetite for considering M&A for a fee producing business, maybe along these lines of credit card portfolio, maybe doing a wholesale purchase to get the ball rolling?
Peter Ho
Well, credit card is a product that we don't have today, at least from a balance sheet standpoint in our portfolio and I think given what's happening on the debit front, it's certainly something worth considering very seriously. So in terms of product, that's what I would say.
In terms of additional businesses that are fee generating, I think to get more profitability is what you're alluding to, it's always something we're interested in pursuing to the extent that it exists here in our home market and it's the type of product that we can, I guess, get our arms around from a franchise standpoint, but other than that, there's nothing really on the horizon.
Russell Gunther – Bank of America Merrill Lynch
Okay. And then lastly, just if you could just give us a little guidance on the tax rate, what you're looking forward in '12?
Kent Lucien
Yeah. Unfortunately, I have to give you a pretty wide range.
It's just the nature of the area and I think I have made this comment in the past, that we could be looking at between 30% and 35% effective rate and I realize that's a wide range, but that's just the nature of that area.
Russell Gunther – Bank of America Merrill Lynch
Understood and I appreciate it. All right guys, thanks for taking my question.
Operator
(Operator instructions). Our next question comes from the line of Bryce Rowe of Robert W.
Baird. You may proceed.
Bryce Rowe – Robert W. Baird & Company
Hi. Thanks.
Most of the topics I wanted to cover were asked. Just one more question.
In the loan portfolio, the other consumer loans jumped by about $25 million. Just wanted to know what that was tied to?
Mary Sellers
We had a specific marketing effort that targeted our existing client base with strong deposit relationships and strong financial profiles. And given we had been out in the market for a period of time, we were pretty successful with that.
Bryce Rowe – Robert W. Baird & Company
Okay. Thank you.
Operator
We have no further questions at this time. I would now like to turn the call back over to Cindy Wyrick for any closing remarks.
Cindy Wyrick
Thank you very much, Chris. I'd like to thank all of you for joining us today and for your continued interest in Bank of Hawaii.
As always, if you have any additional questions or any further clarification on any of the topics discussed today, please feel free to contact me. Have a great day everyone.
Operator
Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation.
You may now disconnect. Have a great day.