Q2 2023 Bank of Hawaii Corp Earnings Call

July 24, 2023

Good day and thank you for standing by welcome to the Bank of Hawaii Corporation Second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press.

Okay.

Star one one on your telephone and you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one again.

Be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Cindy Wyrick director of Investor Relations. Please go ahead.

One on your telephone and you will then hear an automated message advising your hand is raised.

Thank you I'd like to welcome everyone and thank you for joining US today as we discuss the financial results for the second quarter of 2023, joining me today is our CEO Peter Ho, our CFO Dean Chicken Maura, our chief risk Officer, Mary Sellers and the newest member of our IR team Tank Park before we get started let me.

Draw. Your question. Please press Star one one again please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Cindy Wyrick director of Investor Relations. Please go ahead.

Mind, you that todays conference call will contain some forward looking statements and while we believe our assumptions are reasonable there are a variety of reasons that the actual results may differ materially from those projected during the call today, we will be referencing a slide presentation as well as the earnings release, both of which are available on our website.

Remind you that today's conference call will contain some forward looking statements and while we believe our assumptions are reasonable there are a variety of reasons that the actual results may differ materially from those projected during the call today, we will be referencing a slide presentation as well as the earnings release, both of which are available on our website.

<unk> dot com under the Investor Relations tab, and now I would like to turn the call over to Peter Ho.

Thanks, Cindy good morning, or good afternoon, everyone.

Thank you for your interest in <unk> Corporation.

I'll begin today's call with some general commentary on our results I'll, then hand, the call over to Mary to cover off on credit, which is a great story and then David will get a little deeper into the financials. We'll then be happy to entertain your questions.

<unk> dot com under the Investor Relations tab, and now I'd like to turn the call over to Peter Ho.

Thanks, Cindy good morning, or good afternoon, everyone. Thank you for your interest in <unk> Corporation.

Thankfully, we delivered solid results for the second quarter of 2023.

I'll begin today's call with some general commentary on our results.

Total deposits grew in the quarter and we enhanced our liquidity position substantially with cash and immediately available credit lines.

Then hand, the call over to Mary to cover off on credit, which is a great story and then David will get a little deeper into the financials.

Credit remains a strength with NPA and net charge offs of eight basis points and four basis points respectively.

I'd be happy to entertain your questions.

<unk> delivered solid results for the second quarter of 2023 total.

We recorded earnings per share of $1 12 for the quarter net.

Total deposits grew in the quarter and we enhanced our liquidity position substantially with cash and immediately available credit lines.

Net interest income was negatively impacted by higher interest rates and attendant higher borrowing costs <unk>.

Credit remains a strength with <unk>.

Fee income performed well during the quarter and expenses well controlled.

And net charge offs of eight basis points and four basis points respectively.

Both on a reported and normalized basis.

Given the environment expense management will continue to be a particular focus of ours going forward.

We recorded earnings per share of $1 12 for the quarter net.

Net interest income was negatively impacted by higher interest rates and attendant higher borrowing costs.

Deposit quality is obviously a critical factor in today's environment, but I thought I'd spend a little time reviewing bank voids exceptional deposit position.

Fee income performed well during the quarter and expenses well controlled.

Both on a reported and normalized basis.

Our deposit story really begins with the deposit marketplace, which is different from nearly all other deposit markets in the country.

Given the environment expense management will continue to be a particular focus of ours going forward.

97% of the state of Hawaii is deposit base as measured by the FDIC is helped by five local banks all headquartered within the state of Hawaii and all having served the community for many many years. Therefore, it's not surprising that the events of early March with FCB and signature bank at a rather muted impact on the Hawaii market.

Deposit quality is obviously a critical factor in today's environment. So I thought I'd spend a little time reviewing bank Voya is exceptional deposit position.

Our deposit story really begins with the deposit marketplace, which is different from nearly all other deposit markets in the country.

97% of the state of Hawaii deposit base as measured by the FDIC is held by five local banks all headquartered within the state of Hawaii and all having served the community for many many years. Therefore, it's not surprising that the events of early March with SCB of signature bank at a rather muted impact on the Hawaii market.

As compared to the broader national small marketplace.

We built our deposit franchise over a 125 year history, one relationship at a time our deposits deposit base is well diversified and will tender.

49% of our deposits are with consumer clients, 39% with commercial customers and 12% with municipalities.

As compared to the broader national small marketplace.

We built our deposit franchise over a 125 year history, one relationship at a time.

Even within these categories, we have further diversification by industry income demographic and government agency or jurisdictions.

Deposit base is well diversified and well tenured.

<unk>, 49% of our deposits are with consumer clients, 39% with commercial customers and 12% with municipalities.

More than half of our deposits are from clients with whom we've been doing business with for 20 years or longer another 24% are from clients with whom we have been doing business with from between 10 and 20 years.

Even within these categories, we have further diversification by industry income demographic and government agency or jurisdictions.

Given this backdrop it is not surprising that our deposit performance through both the first and second quarters has been quite stable.

Additionally, we've been able to maintain deposit stability, while also keeping funding costs reasonably controlled our deposit beta for Q2 was 21%.

Given this backdrop it is not surprising that our deposit performance through both the first and second quarters has been quite stable.

In terms of additional liquidity, we improved our cash and immediately available lines of credit positions substantially to $8 $5 billion by quarter end broker.

Additionally, we've been able to maintain deposit stability, while also keeping funding costs reasonably controlled our deposit beta for Q2 with 21%.

Broker deposits are yet another form of liquidity available to us. Although we do not currently have broker deposits within our deposit mix as of quarter end.

In terms of additional liquidity, we improved our cash and immediately available lines of credit positions substantially to $8 $5 billion by quarter end.

Given the stability of our deposit base and abundant backup liquidity in place.

Brokered deposits, however, our solid tertiary liquidity option for us.

Broker deposits are yet another form of liquidity available to us. Although we do not currently have broker deposits within our deposit mix as of quarter end.

I'll finish off with a little color on the Hawaiian economy, our visitor industry continues to perform well total visitor expenditures in may were up 19% from 2019 pre pandemic levels. This level includes a still recovering Japan segment, which remains down 66% for preventive levels by spend.

Given the stability of our deposit base and abundant backup liquidity in place.

Brokerage deposits, however, our solid tertiary liquidity option for us.

<unk> single family home prices were down four 5% in June from a year ago $1 million and $50000 inventory. However remains tight at 17 average days on market.

And.

17 days on market and total inventory of $2 six months.

<unk> single family home prices were down four 5% in June from a year ago at $1.050 million inventory. However remains tight at 17 average days on market.

<unk> unemployment rate was down to 3% in June compared to three 7% at year end.

Now, let me turn the call over to Mary Thank you Peter.

Bank of Hawaii as lending philosophy is grounded in two fundamental tenants lending in markets, we know and to longstanding relationships we understand.

And.

17 days on market and total inventory of $2 six months.

<unk> unemployment rate was down to 3% in June compared to three 7% at year end.

While growing the loan portfolio in a safe and measured way over time, our focus is on ongoing disciplined portfolio management, we consistently actively exit those products or segments. The proved to have higher risk profiles, creating upside sized credit losses and volatility.

Now, let me turn the call over to Mary Thank you Peter.

Bank of Hawaii as lending philosophy is grounded in two fundamental tenants lending in markets, we know and to longstanding relationships we understood.

In the consumer portfolio. These noncore segments included land and interest only loans and our residential portfolios purchased home equity pools indirect auto loans originated in Oregon, a revolving personal flex line product and our credit card portfolio.

Similarly in our commercial portfolio, we spent a number of years working out of a scourge small business portfolio a pool of non relationship shared national credits and a large ticket leasing portfolio concur.

In the consumer portfolio. These noncore segments included land and interest only loans and our residential portfolios purchased home equity pools indirect auto loans originated in Oregon are revolving personal flex line product and our credit card portfolio.

Concurrently we're continually focused on optimizing the risk profile within our core portfolio by biasing the mix within it to those products and segments that have proven to carry lower risk.

In our commercial portfolio, we spent a number of years working out of a scored small business portfolio a pool of non relationship shared national credits and a large ticket leasing portfolio.

This disciplined management, coupled with consistent conservative underwriting has proven itself through lower net charge off rates over the years and positions our portfolio to continue to realize lower credit losses through different economic cycles.

Concurrently we are continually focused on optimizing the risk profile within our core portfolio by biasing the mix within it to those products and segments that have proven to carry lower risk.

All of this is reflected in our portfolio construct today, which is built on long tenured relationships diversified by asset categories, with 60% consumer and 40% commercial appropriately sized exposures and 79% secured with real estate with a defined way.

Average loan to value of 55%.

Our commercial real estate portfolio, which represents 27% of the total loan portfolio is diversified across various asset types.

The portfolio built on relationships with demonstrated experience and financial capacity is conservatively leveraged with a weighted average loan to value of 50%.

Loan to value of 55%.

Our commercial real estate portfolio, which represents 27% of the total loan portfolio is diversified across various asset types.

Maturities across the commercial real estate portfolio remain very manageable with 10% maturing prior to 2025.

The portfolio built on relationships with demonstrated experience and financial capacity is conservatively leveraged with a weighted average loan to value of 50%.

Our office portfolio is two 7% of total loans and granular and has a weighted average loan to value of 56% 26% of the portfolio is in the downtown Honolulu Central business District. This segment has a 63% weighted average loan to value and 47% of the.

Maturities across the commercial real estate portfolio.

And very manageable with 10% maturing prior to 2025.

The exposure is further supported by repayment guarantees.

3% of the loans in the office segment, our maturing through 2024.

Tail risk in the commercial real estate portfolio remains modest with just <unk>, 8%, having an LTV greater than 80%.

The exposure is further supported by repayment guarantees.

Our construction portfolio represents 2% of total loans with the majority of this in low income where affordable housing, which continues to be chronically under supplied in our markets.

3% of the loans in the office segment, our maturing through 2024.

Tail risk in the commercial real estate portfolio remains modest with just <unk>, 8%, having an LTV greater than 80%.

Credit quality remained strong in the first quarter with net charge offs of $1 4 million or four basis points.

Our construction portfolio represents 2% of total loans with the majority of this in low income where affordable housing, which continues to be chronically under supplied in our markets.

Credit quality remained strong in the first quarter with net charge offs of $1 4 million or four basis points.

Down one basis point from the first quarter and down four basis points year over year, all nonperforming assets are secured with real estate with a weighted average loan to value of 57%.

Loans delinquent 30 days or more remained stable at 22 basis points at the end of the quarter.

Criticized loans as a percentage of total loans were 147% up modestly for the linked quarter and year over year, but comparable to <unk> 2019.

Down one basis point from the first quarter and down four basis points year over year, all nonperforming assets are secured with real estate with a weighted average loan to value of 57%.

At the end of the quarter the allowance for credit losses was $145 4 million up $1 8 million for the linked quarter and the ratio of the allowance to total loans and lease Outstandings was flat at one point, though 4% given there were no significant changes in the economic forecasts from the University of Hawaii Economic research.

Loans delinquent 30 days or more remained stable at 22 basis points at the end of the quarter.

Criticized loans as a percentage of total loans were $1 four 7% up modestly for the linked quarter and year over year, but comparable to <unk> 2019.

At the end of the quarter the allowance for credit losses was $145 4 million up $1 8 million for the linked quarter and the ratio of the allowance to total loans and lease Outstandings was flat at 1.4% given there were no significant changes in the economic forecast from the University of Hawaii Economic research.

Organization stable asset quality and modest growth.

Allowance does continue to consider downside risks, including higher unemployment inflation and interest rates as well as the general uncertainty in our environment.

The reserve for unfunded commitments was $6 3 million down 700000 for the linked period.

Organizationally stable asset quality and modest growth.

Ill turn the call over to Dean.

Allowance does continue to consider downside risk, including higher unemployment inflation and interest rates as well as the general uncertainty in our environment.

Thank you Mary.

Net interest income was $124 3 million in the second quarter, a decrease of $11 6 million linked quarter net.

The reserve for unfunded commitments was $6 3 million down 700000 for the linked period.

Net interest margin was two 2% a decrease of 25 basis points linked quarter.

I'll now turn the call over to Dean.

Linked quarter decreases in both net interest income and margin were primarily due to higher funding costs, partially offset by loan growth and higher asset yields as the inverted yield curve and higher short term rates continue to pressure our income and margin.

Thank you Mary net.

Net interest income was $124 3 million in the second quarter, a decrease of $11 6 million linked quarter net.

Net interest margin was two 2% a decrease of 25 basis points linked quarter.

We continued to exercise deposit pricing discipline as evidenced by our deposit beta continuing to outperform that of peer banks.

Nevertheless deposit rates are expected to continue to rise and we also expect a continued moderate mix shift from noninterest bearing into interest bearing savings and time deposits.

We continued to exercise deposit pricing discipline as evidenced by our deposit beta continuing to outperform that of peer banks.

As a result, we expect our cumulative deposit beta and this cycle will peak at approximately 30% in the fourth quarter.

Nevertheless deposit rates are expected to continue to rise and we also expect a continued march.

Which while higher than our historic beta of 20%, so still well below levels of peers.

Mix shift from noninterest bearing into interest bearing savings and time deposits.

During the quarter, we continued remixing, our loans by shifting to a greater floating and variable rate exposure.

As a result, we expect our cumulative deposit beta and this cycle will peak at approximately 30% in the fourth quarter.

Which now comprise approximately 60% of new loan originations.

Which while higher than our historic beat of 20%, so still well below levels of peers.

While allowing our investment portfolio to run off.

In addition, we proactively added on balance sheet liquidity as a michigan against higher for longer short term rates, although the higher liquidity negatively impacted our margin by approximately four basis points.

During the quarter, we continued remixing, our loans by shifting to a greater floating and variable rate exposure, which now comprise approximately 60% of new loan originations.

While allowing our investment portfolio to run off.

On the liability side, we added $1 5 billion of fixed rate term funding and an average maturity of $2 five years, an average rate of four 3%.

And also increased our time deposit balances by $380 million at an average rate of 4.0% to 4%.

On the liability side, we added $1 5 billion of fixed rate term funding and an average maturity of $2 five years, an average rate of four 3%.

Six we see flow swaps in the quarter to hedge a portion of our fixed rate loan exposure.

And also increased our time deposit balances by $380 million at an average rate of 4.0% to 4%.

Okay.

From an earning asset perspective, net interest income and margin are being supported by strong cash flow and overall asset repricing at higher rates.

In addition to our on balance sheet actions, we added 200 million notional.

Six we see float swaps in the quarter to hedge a portion of our fixed rate loan exposure.

From an earning asset perspective, net interest income and margin are being supported by strong cash flow and overall asset repricing at higher rates.

In addition to strong cash flow.

Loans and securities repricing there.

The added liquidity and interest rate swaps resulted in a further approximately $4 8 billion in assets that are repricing annually, which provides additional rate sensitivity.

With $2 8 billion of annual cash flows from maturities and Paydowns of loans and investments, we have ample opportunities to redeploy funds into higher yielding assets.

In addition to strong cash flow.

The yield on fixed rate maturities and paydowns of loans and investments in the second quarter was three 8% and two 1% respectively.

Loans and securities repricing.

Added liquidity and interest rate swaps resulted in a further approximately $4 8 billion in assets that are repricing annually, which provides additional rate sensitivity.

The yield on fixed rate maturities and paydowns of loans and investments in the second quarter was three 8% and two 1% respectively.

These cash flows continued to be reinvested predominantly into new loans, which are yielding approximately 7% were held in cash at the fed which preserves liquidity is currently yielding 5.25%.

Included in the results was a $1 5 million gain from the sale of the low income housing tax credit investments.

The first quarter results included $600000 charge.

Noninterest income totaled $43 3 million in the second quarter.

Related to a change in the visa class B conversion ratio, which is reported as a contra revenue item in investment securities gains and losses.

Included in the results was a $1 5 million gain from the sale of low income housing tax credit investment.

Adjusting for these items noninterest income.

The first quarter results included $600000 charge.

$41 7 million in the second quarter, an increase of $400000 linked quarter and lower by 400000 from the second quarter of 2022.

Related to a change in the visa class B conversion ratio, which is reported as a contra revenue item in investment securities gains losses.

Trends in transaction activity and asset management fees have improved off of lower levels and we are starting to see modest growth.

Adjusting for these items noninterest income was $41 7 million in the second quarter, an increase of $400000 linked quarter and lower by 400000 from the second quarter of 2022.

Core noninterest income is expected to be $41 million to $42 million per quarter for the remainder of the year, which is higher than our prior guidance.

Trends in transaction activity and asset management fees have improved off of lower levels and we are starting to see modest growth.

However, there will be a non core charge of 800000 in the third quarter from a further adjustment to the visa class B conversion ratio.

Core noninterest income is expected to be $41 million to $42 million per quarter for the remainder of the year, which is higher than our prior guidance.

This $800000 charge is not included in the core noninterest income guidance.

However, there will be a non core charge of 800000 in the third quarter from me further adjustment to the visa class B conversion ratio.

During the second quarter as is our practice, we managed our expenses in a disciplined manner as inflationary conditions continued.

Expenses in the second quarter was $104 million.

This $800000 charge is not included in the core noninterest income guidance.

Included in the first quarter were severance expenses of $3 1 million and seasonal payroll taxes and benefit expenses from.

During the second quarter as is our practice, we managed our expenses in a disciplined manner as inflationary conditions continued.

From incentive payouts, which totaled $4 million.

Adjusting for the severance and seasonal payroll benefits and expenses in the first quarter expenses in the second quarter decreased by $800000 linked quarter and were up $1 1 million from the second quarter of 2022.

Expenses in the second quarter was $104 million.

Included in the first quarter or severance expenses of $3 1 million and seasonal payroll taxes and benefit expenses.

Im incentive payouts, which totaled $4 million.

The year over year increase of one 1% as well under the annual rate of inflation.

Adjusting for the severance and seasonal payroll benefits and expenses in the first quarter expense.

And then included a considerable increase to the FDIC insurance rates as well as annual employee Merit increases.

Expenses in the second quarter decreased by $800000 linked quarter and were up $1 1 million from the second quarter of 2022.

Expenses in the third quarter are expected to be approximately the same as the second quarter.

The year over year increase of one 1% as well under the annual rate of inflation.

But are expected to trend lower in the fourth quarter.

And then included a considerable increase to the FDIC insurance rates as well as an annual employee merit increases.

While inflation continues to pressure expenses reduced.

Reduced hiring delaying non core projects and other actions are being taken that moderate expense growth.

Expenses in the third quarter are expected to be approximately the same as the second quarter.

To summarize the remainder of our financial performance in the second quarter of 2023 net income was $46 1 million and earnings per common share was $1 12.

But are expected to trend lower in the fourth quarter.

While inflation continues to pressure expenses reduced.

Reduced hiring delaying non core projects and other actions are being taken that moderate expense growth.

Our return on common equity was 14, 95% and our efficiency ratio was 62.07%.

To summarize the remainder of our financial performance in the second quarter of 2023 net income was $46 1 million and earnings per common share was $1 12.

We recorded a provision for credit loss of $2 5 million this quarter.

The effective tax rate in the second quarter was $24 five 7%.

Our return on common equity was 14, 95% and our efficiency ratio was 62.07%.

And the rate for the full year of 2023 is expected to be approximately 24, 5%.

We recorded a provision for credit loss of $2 5 million this quarter.

Our capital remains well within regulatory well capitalized levels with all regulatory capital ratios increasing from the prior quarter.

The effective tax rate in the second quarter was $24 five 7%.

We continue to maintain healthy excesses above the regulatory minimum well capitalized requirements.

And the rate for the full year of 2023 is expected to be approximately 24, 5%.

During the second quarter, we paid out $28 million in common to common shareholders in dividends and $2 million and preferred stock dividends.

Our capital remains well within regulatory well capitalized levels with all regulatory capital ratios increasing from the prior quarter.

We did not repurchase shares of common stock during the quarter under our share repurchase program.

We continue to maintain healthy excesses above the regulatory minimum well capitalized requirements.

And finally, our board declared a dividend of <unk> 70 per common share for the third quarter of 2023.

During the second quarter, we paid out $28 million in common to common shareholders in dividends and $2 million and preferred stock dividends.

Now, we'll be happy to take your questions.

We did not repurchase shares of common stock during the quarter under our share repurchase program.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

And finally, our board declared a dividend of <unk> 70 per common share for the third quarter of 2023.

Now, we'll be happy to take your questions.

One moment, while we compile the Q&A roster.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Our first question comes from the line of Jeff for Lyft with D. A Davidson your line is open.

Thanks, Good morning, Hi.

Hi, Jeff.

Maybe a question for Dean just.

One moment, while we compile the Q&A roster.

On the funding.

Funding costs I guess the cost of funds for the quarter. It went away how does that compare it ended the quarter what was that number and then if you if you have it as well.

Our first question comes from the line of Jeff <unk> with D. A Davidson your line is open.

<unk> June margin overall.

Thanks, Good morning, Hi.

Hi, Jeff.

Maybe a question for Dean.

Okay.

Yes, the funding costs overall.

On the funding.

Funding costs I guess the cost of funds for the quarter. It went away how does that compare it ended the quarter what was that number and then if you if you have it as well.

Are you talking about.

Just on the liability side or.

Cost of product.

For the first quarter, what was that it did.

Monthly June margin overall.

Quarter end spot rate.

43 123.

Yes, the funding costs overall.

Then.

Yours.

Are you talking about.

Margin for the quarter or for the month was $2, one 4%, but keep in mind that when you adjust for the.

Just on the liability side or.

Cost of OTO 104.

For the first quarter, what was that it did.

Quarter end spot rate.

The liquidity that we brought on during the quarter that number is actually more like to 220%. So the liquidity does have a.

43 123.

And then.

Yours.

Margin for the quarter or for the month was $2 one 4%.

Impact on our margin during the month.

Gotcha. Okay later in the quarter later in the quarter.

But keep in mind that when you adjust for the.

Yes.

Liquidity that we brought on during the quarter that number is actually more like to 220%. So the liquidity did have.

Okay.

I wanted to.

Circle back on the expenses.

Pretty specific guidance in the third quarter or the fourth quarter, and Peter and kind of the prepared remarks.

Impact on our margin during the month.

Gotcha. Okay later in the quarter later in the quarter.

Seemed to suggest that a little more.

Yes.

Possibly.

Okay.

I wanted to.

Could could lean on that.

Circle back on the expenses.

Or manage that.

Somewhat lower I don't know if that changes.

Pretty specific guidance in the third quarter or the fourth quarter, and Peter and kind of the prepared remarks.

For the full year guidance was expenses up 3% off of.

Seem to suggest that a little more.

<unk> core basis has that changed at all or is that more of a further out into 'twenty four or am I just reading into.

Possibly.

Could could lean on that.

Or manage that.

Commentary about cost management.

Somewhat lower I don't know if that changes.

Yes, Jeff.

For the full year guidance was expenses up 3% off of.

So we are looking at expenses.

Candidly, we see that line item is one of the controllable items that we have in an environment where margins in rates or are challenged in.

<unk> 'twenty two's core basis has that changed at all or is that more of a further out into 'twenty four or am I just reading into <unk>.

Commentary about cost management.

If fee income is likely to be what it's going to be.

Yes, Jeff.

So this is kind of a reasonable place for us to look I would anticipate to see some impact of.

So we are looking at expenses.

Candidly, we see that line item is one of the controllable items that we have in an environment where margins in rates or are challenged and if fee income is likely to be what it's going to be.

Expense reductions later into this year, so certainly by the fourth quarter and then into next year are not quite ready to kind of provide guidance on what those levels will be lower.

So this is kind of a reasonable place for us to look I would anticipate to see some impact of.

Okay, Yeah, just wanted to check in on that appreciate it.

Expense reductions later into this year, so certainly by the fourth quarter and then into next year are not quite ready to kind of.

Just a last one on.

Peter you've also provided.

Im sorry, this is clunky you've kind of.

You've talked about a capital build if just the securities portfolio matures I can't remember what it was a TCE was a one to two year organically where that could build could you update us on kind of where you sit on.

Guidance on what those levels will be lower.

Okay, Yeah, just wanted to check in on that appreciate it.

Last one on.

Peter you've also provided.

Sorry, this is clunky you've kind of.

Okay.

That process or that.

You've talked about a capital build is it just the securities portfolio matures I can't remember what it was a TCE was a one to two year organically where that could build could you update us on kind of where you sit on.

Direction of TCE.

Not quite clear on the TCE piece, I mean generally Jeff.

We're looking to build capital.

So obviously earnings retention as.

Okay.

As well as taking a good hard look at the asset base of the company and candidly.

That process or that.

Direction of TCE.

The liquidity that we've built is running a little counter to capital build if you will.

Not quite clear on the TCE piece, I mean generally Jeff.

I think obviously for good reason.

We're looking to build capital.

So obviously earnings retention as.

Coming out of the STB signature situation in March the reality, though is our deposit base has been incredibly stable and we have pretty good sized war chest of.

As well as taking a good hard look at the asset base of the company and candidly.

The liquidity that we've built is running a little counter to capital build if you will.

Immediately available backup lines of credit and so the level that may be available at this point is to bring down some of that <unk> seven in cash that we're holding.

I think obviously for good reason.

Coming out of the FCB signature situation in March the reality, though is our deposit base has been incredibly stable and we have pretty good sized war chest of.

It would improve capital.

Holy overtime.

So really our capital plan is as I would characterize it as an organic one at this point.

Immediately available backup lines of credit and so the level that may be available at this point is to bring down some of that billion seven in cash that we're holding.

With an emphasis on retaining earnings as well as managing the overall size of the balance sheet.

It would improve capital.

Great. Okay, I will step back thanks.

Holy overtime.

Yes.

So really our capital plan is as I would characterize it as an organic one at this point.

Thank you one moment for our next question.

With an emphasis on retaining earnings as well as managing the overall size of the balance sheet.

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

Alright, Okay I'll step back thanks.

Hey, good morning, everyone.

Yes.

Hey, Andrew.

Good morning, just a quick question on this liquidity build that came on later in the quarter has all that been deployed into earning assets or are there still some investments to be made on that front.

Okay. Thank you one moment for our next question.

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

It's primarily sitting in fed funds sold right now so readily available liquidity on balance sheet for us.

Hey, good morning, everyone.

Hey, Ed.

The yield.

We're earning at the fed so we're earning fed funds effective.

It's primarily sitting in fed funds sold right now so readily available liquidity on balance sheet for us.

In terms of investments, that's where we're placing the funds.

Got it so I mean, it seems it sounds like that the net effect on the margin will be lower.

The yield.

We're earning at the fed so we're earning fed funds effective.

Net interest income, maybe you're picking up a little bit NII, yes.

And we're also looking back on the.

Right Yeah, yeah. So.

In terms of investments, that's where we're placing the funds.

Yes, that's exactly right.

Dilutive to margin accretive to NII and dilutive to capital.

Got it so I mean, it seems it sounds like that the net effect on the margin will be lower.

And then on loan growth going forward. It seems like you had some pretty good gains on the commercial side I'm just curious what drove that.

Net interest income maybe you are picking up a little bit NII, yes.

Right Yeah, Yeah, so Scott.

Yes, that's exactly right.

And then looking out I mean, how do you expect the total portfolio trend just modest like low to mid single digit growth.

Dilutive to margin accretive to NII and dilutive to capital.

Gotcha Alright.

Yes, I think we have a good C&I quarter.

And then on loan growth going forward. It seems like you had some pretty good gains on the commercial side I'm just curious what drove that and then looking out I mean.

Not sure that's necessarily replicable in the coming quarters.

So we had growth in both commercial as well as consumer.

How do you expect the total portfolio trend just modest like low to mid single digit growth.

And what I would anticipate is likely.

Yes, I think we have a good C&I quarter.

Oil growth to be flat at this point moving forward.

Not sure that's necessarily replicable in the coming quarters.

It seems like.

The consumers slowed down a bit based on rate.

So we had growth in both commercial as well as consumer.

Seems like.

And what I would anticipate is likely.

Herschel clients are.

Sitting on their hands a bit on transactions hopefully we will see that change is more positive signals come out of the economy, hopefully, but for now feels reasonably muted I think.

Oil growth to be flat at this point moving forward.

It seems like.

The consumers slowed down a bit based on rate.

Gotcha.

Seems like <unk>.

Thanks for taking the questions I will step back.

Clients are.

Sitting on their hands a bit on transactions, hopefully, we will see that change.

One moment for our next question.

As more positive signals come out of the economy, hopefully, but for now feels reasonably muted I think.

Our next question comes from the line of Kelly Motta with <unk>. Your line is open.

Gotcha.

Thanks for taking the questions I will step back.

Hi, good morning, Thanks for the questions.

One moment for our next question.

I think I really appreciate the color around the deposits and the updated outlook for.

Deposit betas.

And I believe in the commentary you suggested.

Our next question comes from the line of Kelly Motta with <unk>. Your line is open.

Some continued pressure on noninterest bearing deposits just wondering what.

Hi, good morning, Thanks for the questions.

Your outlook incorporates in terms of noninterest bearing.

I think I really appreciate the color around deposits and the updated outlook.

Brian off.

For deposit betas and I.

Into higher rate accounts, and kind of where those could bottom in terms of.

Believe in the commentary you suggested.

Some continued pressure on noninterest bearing deposits just wondering what.

<unk> deposits as well as timing of this.

Really the last quarter of it or could there be.

Your outlook incorporates in terms of noninterest bearing.

<unk>, assuming we get another rate hike or two.

Run off.

Yes, the guidance around the beta it does incorporate the mixed shift so some drawdown on noninterest bearing into interest bearing deposits.

<unk> into a higher rate accounts and kind of where those could bottom in terms of percentage of deposits as well as timing as this.

Really the last quarter of it or could there be a continuation assuming we get another rate hike or two.

So that was at 30%, peaking into the fourth quarter.

We're looking at it right now we're at 29% noninterest bearing mix coming down to maybe 27 26, 27%.

Yes.

Guidance around the beta it does incorporate the mixed shift so some drawdown on noninterest bearing.

Interest bearing deposits.

Yes, Kelly that would put us at about interestingly the midpoint between the pre pandemic levels, which were call it 30% ish and kind of the <unk> levels, where rates, obviously were higher kind of the.

So that was at 30%, peaking in the fourth quarter.

We're looking at it right now we're at 29% noninterest bearing mix coming down to maybe 27 26, 27%.

Mid Twenty's and so.

Which kind of which base will head to head with thinking that's about.

Yes, Kelly that would put us in about interestingly the midpoint between the pre pandemic levels, which were call it 30% ish and kind of the <unk> levels, where rates obviously were higher.

A right way to handicap it.

So we do see some mix shift continuing into this quarter third quarter potentially into the fourth.

Mid Twenty's and so.

So.

I'd mentioned, however that.

Knowing which kind of which base will head to kind of we're thinking that's about.

We have seen some.

Flattening a bit of flattening around that.

A right way to handicap it.

Around the decline it looks like June was down.

So we do see some mix shift continuing into this quarter, the third quarter potentially into the fourth.

Just over 1%.

Which compares to an average of the past year down kind of like 2% per per month.

I'd mentioned, however that.

We have seen some.

So that was an improvement in July .

Flattening a bit of flattening around that.

Looking pretty flat right now so we still have a few days left to the month, but.

Around that decline it looks like June was down.

In fact, if that holds true that probably would be our best performance in about a year on a monthly basis.

Just over 1%.

Which compares to an average of the past year down kind of like 2% per per month.

Got it that's super helpful. And then in terms of the margin.

So that was an improvement in July .

The commentary of margin being about $2 14 for the month of June which incorporates.

Looking pretty flat right now so we still have a few days left to the month, but.

Some of the liquidity build that you had.

In fact, if that holds true that probably will be our best performance in about a year on a monthly basis.

Can you just remind us when you put on.

Got it that's super helpful. And then in terms of the margin.

You took on those fixed rate borrowings and through on the cash in terms of the timing of that just wondering if that's fully reflected in that June margin and then kind of from here as we look out.

The commentary of margin being about $2 14 for the month of June which incorporates.

Some of the liquidity build that you had.

And your expectations for.

Can you just remind us when you put on.

And I E.

<unk> declines.

You took on those fixed rate borrowings and through on the cash in terms of the timing of that just wondering if that's fully reflected in that June margin and then kind of from here as we look out.

Got.

The commentary around deposit beta.

How we should be thinking about the margin on a go forward basis, assuming another rate hike or two.

Yeah, Okay. So the.

And your expectations for.

The term funding was placed our right in the middle part of me so kind of right in the middle of the quarter. So the.

And IV.

Declines in <unk>.

Got it.

The commentary around deposit beta.

June margin at $2 40 would have reflected the.

How we should be thinking about the margin on a go forward basis, assuming another rate hike or two.

The full impact of that liquidity.

Yeah, Okay. So the.

So that's.

The term funding was placed.

As you look out into the.

Right in the middle part of me, so kind of right in the middle of the quarter. So the.

Towards the end of the year, we do expect.

The margin to bottom in the fourth quarter.

June margin at $2 14 would've reflected the.

And kind of decelerating from what we saw in the second quarter.

The full impact of that liquidity.

So kind of a gradual decrease and then bottoming in the fourth.

So that's.

As you look out into the.

Got it.

Towards the end of the year, we do expect.

Appreciate that.

And.

The margin to bottom in the fourth quarter.

You said you put on some swaps during the quarter can you just provide us a bit more color just trying to get some sense on how to how to model around that.

And kind of decelerating from what we saw in the second quarter.

So kind of a gradual decrease and then bottoming in the fourth.

Okay.

Must be amount and.

Got it.

Of that so that would just be helpful in terms of modeling.

Appreciate that.

And.

Sure. They were it was 200 million notional.

You said you put on some swaps during the quarter can you just provide us a bit more color just trying to get some sense on how to how to model around that.

Towards the end of the quarter that we put on.

It's up.

Fixed receipt flow.

Okay.

Must be amount and.

Swap hedging some of our fixed rate loans.

Of that so that would just be helpful in terms of modeling.

So above the two two year, two and a half year type of term.

Sure. They were it was 200 million notional.

Towards the end of the quarter that we put on.

Okay got it maybe last one for me if I could sneak it in.

Pay fix receipt flow.

With capital I know you said you're in the rebuild mode.

Swap hedging some of our fixed rate loans.

Just to in terms of the dividend I think you reiterated the 70 cent dividend.

So above the two two year, two and a half year type of term.

Around earnings, but just wondering.

Okay got it maybe last one for me if I could sneak it in.

How you guys feel about this level, obviously the earnings have come down a bit with the margin I'm wondering how you're feeling in terms of the comfort level to pay out.

With capital I know you said you're in the rebuild mode.

Just to in terms of the dividend I think you reiterated the 70 cent dividend.

At this stage.

Yes.

Kelly so the dividends, obviously are strategic to us and our desire is to maintain our dividend levels of course, that's earnings willing and interest rate interest rates willing to inflation and credit and all of those factors and so our process is too.

Around <unk>, but just wondering.

How you guys feel about this level, obviously the earnings have come down.

Bet with the margin I'm wondering how you're feeling in terms of the comfort level to pay out.

At this stage.

Yes.

Assess that with our board.

Kelly so the dividends, obviously are strategic to us and our desire is to maintain our dividend levels of course, that's earnings willing and interest rate interest rates William inflation in credit and all of those factors and so our process is too.

At the end of every quarter.

For now our desire is to maintain that level.

Thank you so much I'll step back take.

Take care.

Thank you that concludes the question and answer session. At this time I would like to turn the call back to Cindy Wyrick for closing remarks.

Assess that with our board.

At the end of every quarter.

For now our desire is to maintain that level.

Thank you so much I'll step back.

Take care.

Thank you that concludes the question and answer session. At this time I would like to turn the call back to Cindy Wyrick for closing remarks.

Need further clarification on any of the topics discussed today. Thanks, everyone have a good day.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Thank you everyone again for joining us today and for your continued interest in bank of Hawaii as always please feel free to reach out to either Chang or me. If you have any additional questions or if you need further clarification on any of the topics discussed today. Thanks, everyone have a good day.

Yes.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

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[noise] an automated message advising your hand is raised to withdraw your question. Please press star one one again please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Cindy Wyrick director of Investor Relations. Please go ahead.

Before we get started let me remind you that today's conference call will contain some forward looking statements and while we believe our assumptions are reasonable there are a variety of reasons that the actual results may differ materially from those projected during the call today, we will be referencing a slide presentation as well as the earnings release, both of which are available.

<unk> on our website <unk> com under the Investor Relations tab and now we'd like to turn the call over to Peter Ho.

Thanks, Cindy good morning, or good afternoon, everyone. Thank you for your interest and bank of Hawaii Corporation.

I'll begin today's call with some general commentary on our results I'll, then hand, the call over to Mary to cover off on credit, which is a great story and then they will get a little deeper into the financials. We'll then be happy to entertain your questions.

Thankfully, we delivered solid results for the second quarter of 2023.

Total deposits grew in the quarter and we enhanced our liquidity position substantially with cash and immediately available credit lines of.

Credit remains a strength with NPA and net charge offs of eight basis points and four basis points respectively.

We've recorded earnings per share of $1 12 for the quarter net.

Net interest income was negatively impacted by higher interest rates and attendant higher borrowing costs.

Fee income performed well during the quarter and expenses well controlled.

On a reported a normalized basis.

Given the environment expense management will continue to be a particular focus of ours going forward.

Deposit quality is obviously a critical factor in today's environment, but I thought I'd spend a little time reviewing bank boys exceptional deposit position.

Our deposit story really begins with the deposit marketplace, which is different from nearly all other deposit markets in the country.

97% of the state of Hawaii is deposit base as measured by the FDIC is helped by five local banks all headquartered within the state of Hawaii and all having served the community for many many years.

Therefore, it's not surprising that the events of early March with SCB of signature bank at a rather muted impact on the Hawaii marketplace as compared to the broader national small marketplace.

We built our deposit franchise over a 125 year history, one relationship at a time.

Deposit base is well diversified and well tenured.

<unk>, 49% of our deposits are with consumer clients, 39% with commercial customers and 12% with municipalities.

Even within these categories, we have further diversification by industry income demographic and government agency or jurisdictions.

Given this backdrop it is not surprising that our deposit performance through both the first and second quarters has been quite stable.

Additionally, we've been able to maintain deposit stability, while also keeping funding costs reasonably control our deposit beta for Q2 was 21%.

In terms of additional liquidity, we improved our cash and immediately available lines of credit positions substantially to $8 $5 billion by quarter end.

Broker deposits are yet another form of liquidity available to us. Although we do not currently have broker deposits within our deposit mix as of quarter end.

Given the stability of our deposit base and abundant backup liquidity in place.

Brokered deposits, however, our solid tertiary liquidity option for us.

<unk> single family home prices were down four 5% in June from a year ago at $1 million at $50000 inventory. However remains tight at 17 average days in our market.

And.

17 days on market and total inventory up to six months.

<unk> unemployment rate was down to 3% in June compared to three 7% at year end.

Now, let me turn the call over to Mary Thank you Peter.

Bank of Hawaii as lending philosophy is grounded in two fundamental tenants in markets, we know and to longstanding relationships, we understand well.

Growing the loan portfolio in a safe and measured way over time, our focus is on ongoing disciplined portfolio management, we consistently actively exit those products or segments that proved to have higher risk profiles, creating upside sized credit losses and volatility.

In the consumer portfolio. These noncore segments included land and interest only loans and our residential portfolios purchased home equity pause indirect auto loans originated in Oregon are revolving personal flex line product and our credit card portfolio.

In our commercial portfolio, we spent a number of years working out of a scourge small business portfolio a pool of non relationship shared national credits and a large ticket leasing portfolio.

Concurrently we're continually focused on optimizing the risk profile within our core portfolio by biasing the mix within it to those products and segments that have proven to carry lower risk.

This disciplined management, coupled with consistent conservative underwriting has proven itself to lower net charge off rates over the years and positions our portfolio to continue to realize lower credit losses through different economic cycles.

Loan to value of 55%.

Our commercial real estate portfolio, which represents 27% of the total loan portfolio is diversified across various asset types.

Folio built on relationships with demonstrated experience and financial capacity is conservatively leveraged with a weighted average loan to value of 50%.

Maturities across the commercial real estate portfolio.

And very manageable with 10% maturing prior to 2025.

The exposure is further supported by repayment guarantees.

3% of the loans in the office segment, our maturing through 2024.

Tail risk in the commercial real estate portfolio remains modest with just <unk>, 8%, having an LTV greater than 80%.

Our construction portfolio represents 2% of total loans with the majority of this in low income where affordable housing, which continues to be chronically under supplied in our markets.

Credit quality remained strong in the first quarter with net charge offs of one 4 million or four basis points.

Annualized of total average loans and lease Outstandings down four basis points for the linked quarter and up two basis points year over year nonperforming assets were $11 5 million or eight basis points down one basis point from the first quarter and down four basis points year over year, all nonperforming assets are secured.

With real estate with a weighted average loan to value of 57% loans.

Loans delinquent 30 days or more remained stable at 22 basis points at the end of the quarter.

Criticized loans as a percentage of total loans were $1 four 7% up modestly for the linked quarter and year over year, but comparable to <unk> 2019.

At the end of the quarter the allowance for credit losses was $145 4 million up $1 8 million for the linked quarter and the ratio of the allowance to total loans and lease Outstandings was flat at 1.4% given there were no significant changes in the economic forecast from the University of Hawaii Economic research.

As Asian stable asset quality and modest growth.

The allowance does continue to consider downside risks, including higher unemployment inflation and interest rates as well as the general uncertainty in our environment.

For unfunded commitments was $6 3 million down 700000 for the linked period.

Now ill turn the call over to Dean.

Thank you Mary.

Net interest income was $124 3 million in the second quarter, a decrease of $11 6 million linked quarter net interest margin was two 2% a decrease of 25 basis points linked quarter.

We continued to exercise deposit pricing discipline as evidenced by our deposit beta continuing to outperform that of peer banks.

The less deposit rates are expected to continue to rise and we also expect a continued moderate mix shift from noninterest bearing into interest bearing savings and time deposits.

As a result, we expect our cumulative deposit beta and this cycle will peak at approximately 30% in the fourth quarter.

Which while higher than our historic beta of 20% is still well below peak levels of peers.

During the quarter, we continued remixing, our loans by shifting to a greater floating and variable rate exposure, which now comprise approximately 60% of new loan originations.

While allowing our investment portfolio to run off.

On the liability side, we added $1 5 billion of fixed rate term funding and an average maturity of two five years, an average rate of four 3%.

It also increased our time deposit balances by $380 million at an average rate of 4.0% to 4%.

In addition to our on balance sheet actions, we added 200 million notional.

<unk> received float swaps in the quarter to hedge a portion of our fixed rate loan exposure.

Okay.

From an earning asset perspective, net interest income and margin are being supported by strong cash flow and overall asset repricing at higher rates.

With $2 8 billion of annual cash flows from maturities and Paydowns of loans and investments, we have ample opportunities to redeploy funds into higher yielding assets.

In addition to strong cash flow low.

Loans and securities repricing.

The added liquidity and interest rate swaps resulted in a further approximately $4 8 billion in assets that are repricing annually, which provides additional rate sensitivity.

The yield on fixed rate maturities and paydowns of loans and investments in the second quarter was three 8% and two 1% respectively.

These cash flows continue to be reinvested predominantly into new loans, which are yielding approximately 7% were held in cash at the fed which preserves.

Liquidity is currently yielding 5.25%.

Noninterest income totaled $43 3 million in the second quarter.

Included in the results was a $1 5 million gain from the sale of the low income housing tax credit investment.

The first quarter results included $600000 charge.

Related to a change in the visa class B conversion ratio, which is reported as a contra revenue item in investment securities gains losses.

Adjusting for these items noninterest income.

$41 7 million in the second quarter, an increase of $400000 linked quarter and lower by 400000 from the second quarter of 2022.

Trends in transaction activity and asset management fees have improved off of more levels and we are starting to see modest growth.

Core noninterest income is expected to be $41 million to $42 million per quarter for the remainder of the year, which is higher than our prior guidance.

However, there will be a non core charge of 800000 in the third quarter from me further adjustment to the visa class B conversion ratio.

This $800000 charge is not included in the core noninterest income guidance.

During the second quarter as is our practice, we managed our expenses in a disciplined manner as inflationary conditions continued.

Expenses in the second quarter was $104 million.

Included in the first quarter or severance expenses of $3 1 million and seasonal payroll taxes and benefit expenses from incentive payouts, which totaled $4 million.

Adjusting for the severance and seasonal payroll benefits and expenses in the first quarter expenses.

Expenses in the second quarter decreased by $800000 linked quarter and were up $1 1 million from the second quarter of 2022.

The year over year increase of one 1% as well under the annual rate of inflation and then included a considerable increase to the FDIC insurance rate as well as annual employee Merit increases.

Expenses in the third quarter are expected to be approximately the same as the second quarter, but are expected to trend lower in the fourth quarter.

While inflation continues to pressure expenses.

<unk> hiring delaying non core projects and other actions are being taken that moderate expense growth.

To summarize the remainder of our financial performance in the second quarter of 2023 net income was $46 1 million and earnings per common share was $1 12.

Our return on common equity was $14, 95% and our efficiency ratio was 62.07%.

We recorded a provision for credit loss of $2 5 million this quarter.

The effective tax rate in the second quarter was $24 five 7% and.

And the rate for the full year of 2023 is expected to be approximately 24, 5%.

Our capital remains well within regulatory well capitalized levels with all regulatory capital ratios increasing from the prior quarter.

We continued to maintain healthy excesses above the regulatory minimum well capitalized requirements.

During the second quarter, we paid out $28 million in common to common shareholders in dividends and $2 million and preferred stock dividends.

We did not repurchase shares of common stock during the quarter under our share repurchase program.

And finally, our board declared a dividend of <unk> 70 per common share for the third quarter of 2023.

Now, we'll be happy to take your questions.

One moment, while we compile the Q&A roster.

Our first question comes from the line of Jeff <unk> with D. A Davidson your line is open.

Thanks, Good morning, Hi.

Hi, Jeff.

Maybe a question for Dean just.

On the funding costs I guess the cost of funds for the quarter. It went away how does that compare it ended the quarter what was that number and then if you if you have it as well.

Monthly June margin overall.

Yes, the funding costs overall.

Are you talking about.

Just on the liability side or.

Cost of product.

For the first quarter and what was that.

Quarter end just spot rate 443 123.

And then.

Yours.

Margin for the quarter or for the month was $2 one 4%.

But keep in mind that when you adjust for the.

Our liquidity that we brought on during the quarter that number is actually more like to 220%. So the liquidity did have.

Impact on our margin during the month.

Gotcha. Okay later in the quarter later in the quarter.

Yes.

Okay.

I wanted to.

Circle back on the expenses.

Pretty specific guidance in the third quarter, the fourth quarter, and Peter and kind of the prepared remarks.

Seem to suggest that a little more.

Possibly.

Could could lean on that.

Or manage that.

Somewhat lower I don't know if that changes that you've seen.

For the full year guidance was expenses up 3% off of.

<unk> 'twenty two's core basis has that changed at all or is that more of a further out into 'twenty four or am I just reading it.

Commentary about.

Cost management.

Yes, Jeff we're so we are looking at expenses.

Candidly, we see that line item is one of the controllable items that we have in an environment where margins in rates or are challenged and if fee income is likely to be what it's going to be.

So this is kind of a reasonable place for us to look I would anticipate to see some impact of Av.

Expense reductions later into this year, so certainly by the fourth quarter and then into next year are not quite ready to kind of provide guidance on what those levels will be lower.

Okay. Yeah, just wanted to check in on that I appreciate it and just a last one on.

Peter you've also provided.

Sorry, this is clunky you've kind of.

You've talked about a capital build just the securities portfolio matures I can't remember what it was a TCE of.

One to two year organically, where that could build could you update us on kind of where you sit on.

Okay.

That process or that.

Direction of.

TCE.

Not quite clear on the TCE piece, I mean generally Jeff we're looking to build capital.

We're obviously earnings retention as.

As well as taking a good hard look at the asset base of the company and candidly.

The liquidity that we've built is running a little counter to capital build if you will.

I think that was obviously for good reason.

Coming out of the SCB signature situation in March.

The reality, though is our deposit base has been incredibly stable and we have pretty good sized war chest of.

Immediately available backup lines of credit and so the level that may be available at this point is to bring down some of that <unk> seven in cash that we're holding which would improve capital slowly over time.

So really our capital plan is as I would characterize it as an organic one at this point.

With an emphasis on retaining earnings as well as managing the overall size of the balance sheet.

Great Okay, I'll step back thanks.

Thanks, Jeff.

Thank you one moment for our next question.

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

Hey, good morning, everyone. Good morning Ann.

Good morning, just a quick question on this liquidity build.

That came on later in the quarter has all that been deployed into earning assets or are there.

There is still some investments to be made on that front.

It's primarily sitting in fed funds sold right now so readily available liquidity on balance sheet for us.

The yield we're in.

It's at the fed so we're earning fed funds effective.

And we're also looking back on the.

In terms of investments, that's where we're placing the funds.

Got it so I mean, it seems it sounds like that the net effect on the margin will be lower but on.

Net interest income, maybe you're picking up a little bit NII, yes, right right right, yes, yes.

Got it that's it.

Exactly right.

Dilutive to margin accretive to NII and dilutive to capital.

Gotcha Alright.

And then on loan growth going forward. It seems like you had some pretty good gains on the commercial side I'm just curious what drove that.

And then looking out.

How do you expect the total portfolio a trend just modest low to mid single digit growth.

Yes, I think we had a good C&I quarter.

Im not sure that necessarily replicable in the coming quarters.

So we had growth in both commercial as well as consumer.

And what I would anticipate is likely.

Hello growth to be flat at this point moving forward.

It seems like.

The consumers slowed down a bit based on rate.

Slide <unk>.

Clients are.

Sitting on their hands a bit on transactions, hopefully we will see that.

Change is more positive signals come out of the economy, hopefully, but for now feels reasonably muted I think.

Got you.

Thanks for taking the questions I will step back.

One moment for our next question.

Our next question comes from the line of Kelly Motta with <unk>. Your line is open.

Hi, good morning, Thanks for the questions.

I think I really appreciate the color around deposits and the updated outlook.

For deposit betas and I believe in the commentary you suggested.

Some continued pressure on noninterest bearing deposits just wondering what.

Your outlook incorporates in terms of noninterest bearing.

Runoff.

Into higher rate accounts, and kind of where those could bottom in terms of percentage of deposits as well as timing as this.

Really the last quarter of it or could there be a continuation assuming we get another rate hike or two.

Yes.

Our guidance around the beta it does incorporate the mixed shift so some draw down on the noninterest bearing.

Interest bearing deposits.

It was at 30%, peaking in the fourth.

<unk> fourth quarter.

We're looking at it right now we're at 29% noninterest bearing mix coming down to maybe 27 26, 27%.

Yes, Kelly that would put us at about interestingly the midpoint between the pre pandemic levels, which were call it 30% ish and kind of Oh, several levels where rates obviously were higher.

The mid Twenty's, and so not knowing which kind of.

Beth will head to kind of we're thinking that's about.

A right way to handicap it.

So we do see some mix shift continuing into this quarter third quarter potentially into the fourth.

I'd mentioned, however that.

We have seen some.

Flattening a bit of flattening around that.

Around that decline it looks like June was down.

Just over 1%, which.

Which compares to an average of the past year down kind of like 2% per per month. So that was an improvement in July .

Is looking pretty flat right now so we still have a few days left in the month, but.

If that holds true that probably would be our best performance in about a year on a monthly basis.

Got it that's super helpful. And then in terms of the margin.

The commentary of margin being about $2 14 for the month of June which incorporates.

The liquidity build that you had.

Can you just remind us when you put on.

You took on those fixed rate borrowings and through on the cash in terms of the timing of that just wondering if that's fully reflected in that June margin and then kind of from here as we look out given your expectations for.

And I E.

Declines in <unk>.

The commentary around deposit beta how.

How we should be thinking about the margin on a go forward basis, assuming another rate hike or two.

Yeah, Okay. So the.

The term funding was placed.

Right in the middle part of me, so kind of right in the middle of the quarter. So the.

June margin at 2014 would have reflected that.

The full impact of that liquidity.

So that's one.

As you look out into the.

Towards the end of the year, we do expect the.

The margin to bottom in the fourth quarter.

And kind of decelerating from what we saw in the second quarter.

So kind of a gradual decrease and then bottoming in the fourth.

Got it.

Appreciate that.

And.

You said you put on some swaps during the quarter can you just provide us a bit more color just trying to get some sense on how to how to model around that.

Okay.

You may have missed the amount and.

Of that so that would just be helpful in terms of modeling.

Sure. They were it was 200 million notional.

Towards the end of the quarter that we put on.

So it's a pay fixed receipt flow.

Swap hedging some of our fixed rate loans.

So above the two two year, two and a half year type of term.

Okay got it maybe last one from me if I could sneak it in.

With capital I know you said you're in the rebuild mode.

Just to in terms of the dividend I think you reiterated the 70 cent dividend.

Around earnings, but just wondering.

How you guys feel about this level, obviously the earnings have come down.

But with the margin I'm wondering how you're feeling in terms of the comfort level to pay out.

At this stage.

Yeah. So Kelly so the dividends, obviously are strategic to us and our desire is to maintain our dividend levels of course, that's earnings willing and interest rate interest rates willing to inflation and credit and all of those factors and so our process is too.

Assess that with our board.

At the end of every quarter.

For now our desire is to maintain that level.

Thank you so much I'll step back take.

Take care.

Thank you that concludes the question and answer session. At this time I would like to turn the call back to Cindy Wyrick for closing remarks.

Thank you everyone again for joining us today and for your continued interest in bank of Hawaii as always please feel free to reach out to either Chang or me. If you have any additional questions.

Need further clarification on any of the topics discussed today. Thanks, everyone have a good day.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Q2 2023 Bank of Hawaii Corp Earnings Call

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