Q3 2023 Bank of Hawaii Corp Earnings Call

October 23, 2023

Welcome to the Bank of Hawaii Corporation third 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 star 1-1 on your telephone. You will then hear an automated message advising your hand is raised.

And welcome to the Bank of Hawaii Corporation third 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 this session.

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

To withdraw your question, please press star 11 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 Weyrich, Director of Investor Relations. Please go ahead.

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.

Thank you. Good morning. Good afternoon everyone and thank you for joining us today as we discuss the financial results for the third quarter of 2023. Joining me today is our CEO Peter Ho, our CFO Dean Shigemura, our CFO Mary Sellers, and our IR manager Chang Park.

Thank you good morning, good afternoon, everyone and thank you for joining us today as we discuss the financial results for the third quarter of 2023, joining me today is our CEO Peter Ho, our CFO Dean Sugar Tomorrow, our C. A R O Mary sellers and our IR manager of Chang part before we get started let me remember.

Before we get started, let me remind you that today's conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, there are a variety of reasons the actual results may differ materially from those projected. During the call this morning, we will be referencing a slide presentation as well as the earnings release, both of which are available on our website, www.boh.com, under the Investor Relations tab. And now I'd like to turn the call over to Peter Ho.

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. The actual results may differ materially from those projected during the call. This morning, we will be referencing a slide presentation as well as the earnings release, both of which are available on our website.

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

Thanks, Andy. Good morning or good afternoon, everyone. We appreciate your interest in Bank of Hawaii.

Good morning, or good afternoon, everyone. We appreciate your interest in bank of Hawaii.

Before we begin, I'd like to acknowledge the tragic events of August 8th on Maui and in particular in Lahaina.

Before we begin I'd like to acknowledge the tragic events of August eight on Maui and in particular in lineup.

We are so fortunate that all of our employees on Maui are safe. Unfortunately, our Lahaina brand is not safe.

We are so fortunate that all of our employees on Maui are safe.

Unfortunately, our aligner branch was destroyed.

I'm incredibly proud of and thankful for our Maui leadership team who immediately mobilized into action as the tragedy unfolded, providing support to our affected employees, our customers, and the broader Maui community.

Credibly proud of and thankful for our Maui leadership team well immediately mobilized into action as a tragedy unfolded, providing support to our affected employees, our customers and the broader Maui community here.

Here in Oahu, over 100 of our staff have teamed with Hawai'i Community Foundation to provide processing support for the Maui Strong Relief Fund, which now totals over 150 million dollars. The recovery of L?h?na will take both time and patience. Thank you for your intensity.

Here on Oahu over 100 of our staff is Cambridge, Hawaii Community Foundation.

<unk> processing support for the Maui strong relief fund, which now totals over $150 million.

The recovery of Ohio will take both time and patience.

Oh boy it tends to be there every step of the way.

Now onto the quarter we.

We produced another solid financial performance for the third quarter. Average deposits grew nicely in the quarter. Loan levels were flat.

We produced another solid financial performance for the third quarter average deposits grew nicely in the quarter low levels were flat.

Margin continued to be pressured by the inversion in the curve, although we witnessed a material slowdown in margin erosion compared to the prior quarter.

expenses were well controlled and we improved our capital levels meaning.

Sensors were well controlled and we improved our capital levels meaningfully.

Credit, as Mary will share with you, remains a very good story.

As Barry will share with you it remains a very good story for us.

I'll start off with some commentary on funding and then touch on broader marking additions in the way. I'll then hand it over to Mary who will discuss credit, including the impact of the line of wildfires. And then Dean will then share with you some more granular color on the financial.

I'll start off with some commentary on funding and then touch on broader market conditions in Hawaii, Although I'd hand, it over to Mary who will discuss credit liquidity impact line of wildfires and then Dean will then share with you some more granular color on the financials.

So, why don't we start tang with the composite market share slide?

So why don't we start with the <unk>.

Was it market share slide.

This is generally where I like to begin and just to remind the audience that Hawaii is an interesting deposit market. It's a market where effectively five local institutions hold 97% of the bank deposit market share. The data that you're looking at here is the most recent.

This is generally where I like to begin and just to remind us.

The audience that Hawaii is an interesting deposit market, it's a market where effectively five local institutions hold 97% of the bank deposit market share.

The data that you're looking at here is the most recent.

addition of the FDIC annual summary of deposits. And unfortunately, we're happy to see Bank of Way right up there at the top. Really, as a result of a lot of hard work over the past 125 years, serving ways, consumers, businesses, and municipalities.

Additionally.

The FDIC annual summary of deposits and Unfortunately, we're happy to see bank of way right up there at the top.

Really as a result of a lot of hard work over the past 125 years, serving ways consumers businesses I mean its policies.

Today our deposit balances are 48% consumer, 41% business and 11%.

Today, our deposit balances are 48% consumer 41% business at 11%.

In terms of deposit makeup, you see that 58% of our deposits are either insured or uninsured but collateralized.

In terms of deposit makeup you see that 50.

58% of our deposits are either insured or uninsured collateralized.

Okay.

The deposits are incredibly long tenured, so more than 50% or 53% are deposits are 20 years or older by relationship, and 75% of our deposits are ten years.

The deposits are incredibly long tenured so more than 50% or 53%. Our deposits are 20 years or older by relationship and 75% of our deposits are 10 years or older by relationship.

For the quarter, we have a spot increase of 1.4%, taking us to $20.8 billion for the third quarter. You'll see here, really, for the balance of 2022, our deposit base has been pretty darn stable. Average balances in the quarter were actually of 2.4%. Average balances were, I want to say, $20.5 billion for Q3, as compared to $20 billion for Q2.

For the quarter, we had a spot increase of one 4% taking us to $28 billion.

For the third quarter Youll see here really for the balance of 2022, our deposit basis Ben.

Pretty pretty darn stable average balances in the quarter were actually up two 4%.

Average balances were I want to say 25 billion for Q3 as compared to 21 billion for Q2.

Comparing us to the broader national market of what H8 teams as the small banks, you see that on a year-to-date basis, Bank of Boy has performed quite nicely versus the broader national competitor.

Comparing us to the broader national market.

Teams is the small banks.

You'll see that on a year to date basis.

Bank of Hawaii has performed quite nicely versus the broader national competitor set.

Onto the funding side of deposits. Really, we take what we believe is a very unique marketplace. We take a unique market position within that marketplace and take really a brand or leading top-of-mind brand position within the market to generate meaningful pricing advantages over kind of the median.

Under the funding side of deposits.

Early.

We take what we believe is a very unique marketplace.

We take a unique market position within that marketplace.

Really our brand our leading.

Top of mind brand position within the market to generate meaningful pricing advantages over over medium mid size banks, you see that cost of interest bearing deposits on the next slide you'll see that that also extensive too.

You see that in cost of intersparing deposit.

on the next slide, you'll see that that also extends into funding cost.

Funding costs for total deposits.

And then, obviously, into betas, which are meaningfully lower than our primary.

And then obviously into betas, which are meaningfully lower than our primary competitor set.

So, in addition to having a very stable and strong deposit base over the year, we also have built.

Okay.

So in addition to.

Having a very stable and strong deposit.

Deposit base over the over the year, we also have built.

Quite meaningfully, our tertiary or secondary sources of liquidity. So here you see, as of the third quarter, our backup liquidity, as we like to say, is up to $9.6 billion, the price of cash, security is available, FHLB and or FRB borrowing capacity.

Great quite meaningfully our tertiary or secondary sources of liquidity.

So here you see as of the third quarter, our backup liquidity is as we would like to say.

Up to $9 6 billion comprised of cash securities available FHA and or FRB borrowing capacity.

And so this $9.6 billion is well in excess of our uninsured or uninsured and uncollateralized deposits.

And so this $9 6 billion.

<unk> is well in excess of our uninsured or other shirt uncollateralized deposit base.

Okay.

Switching gears now to the local economy. Performance is remained strong. Unemployment as of September was still down below that of the national average. So at least from an employment standpoint, the state is performing plain nicely versus our US mainland.

Switching gears now to the local economy.

Performance has remained strong unemployment as of September .

It was still down below that of the national average so at least from an employment standpoint, the state is performing quite nicely versus.

Our U S mainland marketplace.

Too early to tell what the impact of the Maui fires will be on employment, but I think we could probably anticipate somewhat of a step up here. But I think the fact of the matter is the supply of labor will still be challenging relative to the overall demand. And so really what I think we'll experience on Maui is not so much a lack of worker demand, but just logistics and how to get workers.

Too early to tell what the impact of the Maui fires will be unemployment.

But I think we could probably anticipate somewhat of a step up here.

But I think the fact of the matter is.

The supply of labor.

Still be challenging relative to the overall demand and so it really I think what we'll experience on Maui.

Not so much.

A lack of worker demand, but just logistics and how to get workers into the right places.

The visitor industry continues to do well. So year to date.

The visitor industry.

It continues to do well.

So year to date.

The state has experienced nice growth both in spending as well as arrivals, up 10%.

The state has experienced nice growth both in spending as well as our rivals up 10%.

by spending up 8% by arrivals. Got there in a little bit different way from the recent past. The US market has moderated a bit as we were anticipating. But that has been more than offset by a nice pickup, as you can see, in both Japanese visitors and spending, as well as by other countries, Canada, Australia.

By spending at up 8% by arrivals got there in a little bit different way from.

From the recent past.

<unk> market has moderated a bit as we were anticipating but that has been more than offset by a nice pick up as you can see in both Japanese visitors and spending as well as by other countries, Canada, Australia et cetera.

In August , the wildfires on Maui were on August 8th. You can imagine that had a pretty meaningful impact to visitor statistics for August . We were down 9% by expenditure and 7% by arrivals as basically Maui came to a standstill. So...

In August .

The wildfires on Maui, where on August 8th you can imagine that had.

A pretty meaningful impact to visitor statistics.

Statistics for August we were down 9%.

By expenditure at 7% by arrivals as basically that we came to a standstill. So.

Maui for Augustas, as you might imagine, had expenditures decline, just about 50%, arrivals were down 57%.

Maui for August as you might imagine had expenditures declined just about 50% arrivals were down 57%.

But when you if you back those numbers out from the overall state, the state was actually still.

But when you if you back those numbers out from the overall state of the state was actually still pretty robust at plus 6% plus 16% ex Maui.

pretty robust at plus 6% and plus 16% x value.

Our understanding or our sense for the visitor industry going forward is kind of a case.

Our our understanding or sense for the.

The visitor industry going forward is kind of a ramp up back to.

ramp up back to a more normal environment post-Lahena. Lahena itself really is driven by Khanapali, which is the primary visitor accommodation site in that part of the island. That sector or that region right now is accommodating a number of federal and FEMA employees. So they're fairing well with a little bit different kind

A more normal environment post lahaina.

The highlight itself.

<unk> is driven by credit quality, which is the primary visitor accommodation site in that part of the island.

That sector or that that region right now is accommodating a number of federal and FEMA employees. So they are faring well with a little bit different kind of visitor stock than they're used to the idea of where the plan. There is to over the course of this year transition from that for a visit or.

visitor staff than they're used to. The idea or the plan there is to over the course of this year transition.

from that form of visitor back to the traditional.

Back to the traditional.

US or international visitor. We'll see how that progresses, but it seems like it sounds like when we're hearing from the hotel side that that is progressing. Other parts of Maui, which were impacted by the line of fire, are beginning to see green shoots, I'd say, of activity. And there is, I think, a fair amount of optimism that the, those outer lying areas of NIE will bounce so far.

U S or international visitor, we'll see how that progresses, but it seems like it sounds like from what we're hearing from the hotel side that that is progressing other parts of Maui, which were impacted by the line of fire.

Are beginning to see.

Green shoots I would say of activity and there is I think a fair amount of optimism that the those outer lying areas.

We'll bounce back so.

For senses that, you know, of course, behind quite expectantly, you know, has had an impact on the visitor industry. It continues to in a short run, but over the next several months, we're hoping to see, you know, a trajectory towards where, it's not a more towards normalization.

Our sense is that of course.

Quite expectedly.

<unk> has had an impact on the visitor industry continues to in the short run.

But over over the next several months, we're hoping to see.

A trajectory towards.

More towards normalization again.

On the next page you see RevHAR or RevNopeRevailable Room for State, which continues to be a very positive story. Mary has some slides and will further in the deck to support that further.

On the next page you see revpar or revenue per available room for state, which continues to be a very positive story and Mary has some slides a little bit further in the deck to support that further.

And then finally to finish off with the real estate, residential real estate market here on Oahu, which is our largest market place. There we see kind of a mixed bag by median sales price. So these are...

And then finally to finish off with.

The real estate residential real estate market here on Oahu, which is our largest marketplace.

There we see.

Kind of a mixed bag by median sales price. So these are September .

September on September numbers down 4.5% for single family homes, but up 6% for condominiums.

September on September <unk>.

Number is.

Down four 5% for single family homes, but up 6% for condominiums.

But what's interesting is despite a pretty meaningful reduction in sales activity, inventory levels remain extremely low. So months inventory for single family homes at 2.7 months, months inventory for condominiums on a law who at three months, days on market still well below.

But what's interesting is despite a pretty meaningful reduction in sales activity inventory levels remain.

STREAMWAY low so.

Inventory for single family homes at two seven months.

Inventory for condominiums on Oahu in three months.

Days on market is still well below.

At 20% 21 days.

So I'll stop there and now let me turn the call over to Mary who can share with you some, some predisp performance for her.

So I'll stop there and now let me turn the call over to Mary who can share with you.

Some.

So credit performance for the third quarter Mary Thank you Peter.

Thank you for your lending philosophy as grounded in two fundamental tenets.

Bank of Hawaii as lending philosophy is grounded in two fundamental tenants.

lending in our core markets of Hawaii and the West Pacific and to longstanding relationships we understand.

Blending in our core markets of Hawaii, and the west specific and to long standing relationships we understand.

We combine this with ongoing discipline for folio management, actively exiting those products or segments that have proven to have higher risk profiles.

We combine this with ongoing disciplined portfolio management.

Typically exiting those products or segments that are proven to have higher risk profiles.

This positions are portfolio for continued lower net charge off through different economic cycles.

This positions our portfolio for continued lower net charge offs through different economic cycles.

Our long portfolio is built on long tenured relationships diversified by asset categories with 59% consumer and 41% commercial. As appropriately sized exposures and is 79% secured with real estate with a combined weighted average LTV of 55%.

Our loan portfolio is built on long tenured relationships diversified by asset categories, with 59% consumer and 41% commercial.

It's appropriately sized exposures and a 79% secured with real estate with a combined weighted average LTV of 55%.

Our commercial real estate portfolio, which represents 27% of the total loan portfolio, is diversified across the 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 55%.

Our commercial real estate portfolio, which represents 27% of the total loan portfolio is diversified across the 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 55.

Sure.

Our office portfolio is granular and has a weighted average loan to value of 56%. 25% of the portfolio is in the downtown Honolulu Central Business District. This segment has a weighted average loan to value of a 63% and 47% of the exposure is further supported by repayment guarantees.

Our office portfolio is granular and has a weighted average loan to value of 56%.

25% of the portfolio is in the downtown Honolulu Central business District. This segment has a weighted average loan to value of 63% and 47% of the exposure is further supported by repayment guarantees to.

2% of loans in the office segment are maturing through 2024.

2% of loans in the office segment, our maturing through 2024.

While not immune from the changing dynamics impacting the office market across the US, they can see and rinse remain stable in the Oahu office market. As conversions to alternative use continue to reduce overall inventory levels as denoted in the Great Bar. In the last five years alone, approximately 1 million square feet of inventory has been removed.

While not immune from the changing dynamics impacting the office markets across the U S vacancy and Brent remained stable in the Oahu office market as conversions to alternative use continue to reduce overall inventory levels as denoted in the gray bars in the last five years alone.

Approximately 1 million square feet of inventory has been removed.

Why supply constraints driven off its unique geography and owners' regulatory process serves to create relative stability in our real estate markets over the long term and less volatility during periods of stress.

Hawaii supply constraints, driven opex unique geography, and onerous regulatory process serves to create relative stability in our real estate markets over the long term and less volatility during periods of stress. This.

This is particularly pronounced in the housing sector, where severely limited supply, again in the grape bars, is compounded by the high cost of home ownership. These two factors continue to drive consistent, strong, rental demands.

This was particularly pronounced in the housing sector were severely limited supply again in the gray bars is compounded by the high cost of homeownership. These two factors continue to drive consistent strong rental demand.

Type market conditions also continue to persist in the Oahu industrial market with vacancy rates at historic lows sub 1%.

Tight market conditions also continue to persist in the Oahu industrial market with vacancy rates at historic lows sub 1%.

A wa'ahu's retail market, whether it's supply chain disruptions, manufacturing shutdowns, backlogs, seaports, and inflation with vacancy and rents returning to pre-pandemic levels. Grocery and drug anchored retail continue to outperform.

<unk> retail market, whether it's supply chain disruptions manufacturing shutdowns backlog seaports and inflation with vacancy and rent returning to pre pandemic levels grocery and drug anchored retail continue to outperform.

Despite the protracted delay in the return of the Japanese visitors to pre-pandemic levels, Black inventory levels again help to support occupancy and rep part levels. The Vian Islands remain a top-biped destination in terms of highest revenue per average room and average daily room rate, with a Wahoo attracting more visitors than any other island in the state.

Despite the protracted delay in the return of the Japanese visitors to pre pandemic levels flat inventory levels again helped to support occupancy and revpar levels. The Hawaiian Islands remain a top type destination in terms of highest revenue per average and average daily room rate with a lawsuit.

<unk> more visitors than any other island in the state.

In addition to the continued strength in our markets real estate fundamentals, we have just 8% of our commercial mortgage loans maturing prior to 2025, minimizing repricing risk in the portfolio.

Tail risk in the commercial real estate portfolio remains modest with just 8.8% having an LTV greater than 80%.

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

Our construction portfolio represents 2% of total loans with the primary segment being low income or affordable housing, which continues to be chronically under supply in our market.

Our construction portfolio represents 2% of total loans with the primary segment being low income or affordable housing, which continues to be chronically under supplied in our markets.

Turning to Maui, Maui represents 11% of the state's population and 11% of the state's real GDP.

Our loans in the fire impacted zones of La Hina and Kula total 169 million or 1% of total loans.

Our loans and the fire impacted zones of liner and cooler totaled $169 million or 1% of total loans.

The majority of this or 93% is secured with insurance proceeds providing substantial coverage for those properties that were destroyed.

After accounting for insurance shortfalls and 50% of land value associated with those properties and a conservative 50% loss rate on unsecured direct and indirect auto loans, we estimate our potential loss directly related to the area impacted by the fires at 10.8 million.

After accounting for insurance shortfalls, and 50% of land value associated with those properties and a conservative 50% loss rate on unsecured direct and indirect auto loans, we estimate our potential loss directly related to the area impacted by the fires at $10 8 million.

As the quality remains strong in the third quarter, with net charge also two million or six basis points annualized of total loans and lease outstanding. Up 700,000 or two basis points for the link quarter, end up 900,000 or three basis points year over year.

Asset quality remains strong in the third quarter with net charge offs of $2 million or six basis points annualized of total loans and lease outstandings up 700000, or two basis points for the linked quarter and up 900000 or three basis points year over year nonperforming assets were 11 5 million.

Non-performing assets were 11.5 million or 8 basis points.

Or eight basis points stable from the second quarter and down $2 $3 million or two basis points year over year. All nonperforming assets are secured with real estate with a weighted average loan to value of 56%.

stable from the second quarter and down 2.3 million or two basis points year over year. All non-performing assets are secured with real estate with a weighted average loan to value of 56%.

Lones to length when 30 days or more remained relatively stable at 23 basis points at the end of the quarter.

Loans delinquent 30 days or more remained relatively stable at 23 basis points at the end of the quarter.

Criticized loans as a percentage of total loans were 2% at the end of the quarter, but down to 1.74% of total loans by the middle of October , as we continue to see improved financial performance in a number of credits, which have been slower to recover from the ancillary impacts of COVID.

Criticized loans as a percentage of total loans were 2% at the end of the quarter, but down to 174% of total loans by the middle of October as we continue to see improved financial performance in a number of credits which have been slower to recover from the ancillary impacts of Covid.

The allowance for loan of lease losses was $145.3 million at the end of the quarter, down a hundred thousand for the link period, and down 1.2 million from the same period in 22. The ratio of the allowance for credit losses to total loans and lease is outstanding, was 1.04% at the end of the quarter, flat with the prior quarter, and down six basis points from the comparable period in 2022. I'll now turn the call over to you. Thank you.

The allowance for loan and lease losses was $145 3 million at the end of the quarter down 100000 per the linked period and down $1 2 million from the same period in 2002, the ratio of the allowance for credit losses to total loans and leases outstanding was one 4% at the end of the quarter flat with the prior quarter.

And down six basis points from the comparable period in 2022, I will now turn the call over to Jay.

Thank you Mary.

Net interest income was 120.9 million in a third quarter. It decreased a 3.4 million link quarter. Net interest margin was 2.13%, a decrease of nine basis points link quarter.

Net interest income was $129 million in the third quarter, a decrease of $3 4 million linked quarter net.

Net interest margin was $2, one 3% a decrease of nine basis points linked quarter.

Link quarter decreases in both net interest income and margin were primarily due to higher funding costs partially offset by higher asset yields as the inverted yield curve at higher short term rates continue to pressure income and margin

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

We continue to exercise deposit pricing discipline as evidence by our deposit beta continuing to all perform that of peer bank.

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

As of the third quarter of 2023, our cumulative total deposit data was 26%.

As of the third quarter of 2023, our cumulative total deposit beta was 26%.

We expect our deposit data through the cycle to be 28 to 30%, which is consistent with our prior guidance, but also incorporates the potential that we may achieve on modestly lower levels.

We expect our deposit beta through the cycle to be 28% to 30%, which is consistent with our prior guidance, but also incorporates the potential that we may that we may achieve a modestly lower level.

In the third quarter, deposit rates exhibited early signs of stabilized.

In the third quarter deposit rates exhibited early signs of stabilizing.

However, we are continuing to expect a moderate further mix shift from non-interest-faring deposits, which represented 27% of our total deposits as of the end of the quarter, to interfering savings and time deposits.

However, we are continuing to expect a moderate further mix shift from noninterest bearing deposits, which represented 27% of our total deposits as of the end of the quarter to interest bearing savings and time deposits.

To better position our cells for higher for longer interest rates and actively manage our asset duration, we added 1.8 billion note of pay fix received flowed swaps in the quarter. They had a portion of our fixed rate loan available for sale securities portfolio.

To better position ourselves for higher for longer interest rates and actively manage our asset duration. We added $1 8 billion notional pay fixed receipt flow swaps in the quarter to hedge a portion of our fixed rate loan available for sale securities portfolios.

Bringing our total swap portfolio to 2 billion at the end of the third

Our total swap portfolio to $2 billion at the end of the third quarter.

In October , we continue to improve our position with an additional 500 million notion of bringing our current total swap portfolio to two.

In October we continued to improve our position with an additional 500 million notional, bringing our current total.

Total swap portfolio to $2 5 billion.

The additional, the addition of swaps has increased the floating in adjustable portion of our earning assets to 41% from 27% at the beginning of the year and reduces the risk from higher interest rates.

The additional the addition of swaps has increased our floating and adjustable portion of our earning assets to 41% from 27% at the beginning of the year and reduces the risk.

Higher interest rates.

In addition to the hedges that we added in the third quarter, that interest income and margin continue to be supported by strong cash flow and overall asset repricing and higher rates.

In addition to the hedges that we added in the third quarter net interest income and margin continue to be supported by strong cash flow and overall asset repricing at higher rates.

Maturities and pay downs of the loan and investment portfolio of 2.8 billion continue to provide an ongoing supplement to the 5.6 billion in assets which includes our interest rate swap portfolio that reprise annually.

Maturities and Paydowns of the loan and investment portfolio of $2 8 billion continues to provide an ongoing supplement to the $5 6 billion in assets, which includes our interest rate swap portfolio that reprice annually.

When including the 500 million of additional swaps completed in October , assets repricing annually is 6.1 billion.

When including the $500 million of additional swaps completed in October assets repricing annually at $6 1 billion.

Unknown Executive: Day and welcome to the Bank of Hawaii Corporation, 3rd 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 star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded.

The yield on fixed rate, maturedies and paydowns of loans and investments in the third quarter was 3.9% and 2.2% expected.

The yield on fixed rate maturities and paydowns of loans and investments in the third quarter was three 9% and two 2% respectively.

These cash flows continue to be reinvested predominantly into new loans, which are yielding greater than 7% on average, or held in cash at the Fed, which earns an attractive yield and preserves liquidity.

These cash flows continue to be reinvested predominantly into new loans, which are yielding greater than 7% on average are held in cash at the fed which earns an attractive yield and preserves liquidity.

In the third quarter, the strength of our deposits, reliable cash flows, and strong liquidity position, enabled us to remix our liabilities and reduce non-core funding by 2.2 billion.

In the third quarter, the strength of our deposits reliable cash flows and strong liquidity position enabled us to remix our liabilities and reduce noncore funding by $2 2 billion.

Cynthia Wyrick: I would now like to hand the conference over to your speaker today, Cindy Wyrick, Director of Investor Relations. Please go ahead. Thank you.

Cynthia Wyrick: Good morning. Good afternoon, everyone. And thank you for joining us today as we discuss the financial results for the 3rd quarter of 2023. Joining me today is our CEO, Peter Ho, our CFO, Dean Shigemura, our CRO, Mary Sellers, and our IR manager, Chang Park. Before we get started, let me remind you that today's conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, there are a variety of reasons the actual results may differ materially from those projected. During the call this morning, we will be referencing a slide presentation as well as the earnings release, both of which are available on our website, boh.com, under the Investor Relations tab.

consisting of 1.2 billion fixed rate SHLB advances. 575 million repurchase agreements.

Consisting of $1 2 billion fixed rate <unk> advances $575 million repurchase agreements.

and 377 million of public time deposit.

And $377 million of public time deposits.

In addition to reducing interest expense, these actions reduced our balance sheet leverage and improved our capital position.

In addition to reducing interest expense these actions reduced our balance sheet leverage and improved our capital position.

Taking it to consideration the rate environment and the reduction in our balance sheet from these changes.

Taking into consideration the rate environment and the reduction in our balance sheet from these changes.

We expect net interest income will be modestly lower in the fourth quarter, but that net interest margin will increase three to five base.

We expect net interest income will be modestly lower in the fourth quarter, but that net interest margin will increase 3% to five basis points.

Yes.

Non-interesting income totals 50.3 million in the third quarter.

Noninterest income totaled $53 million in the third quarter.

Peter Ho: And now I'd like to turn the call over to Peter Ho, Peter. Thanks, Denise. Good morning or good afternoon, everyone. We appreciate your interest in bank void. Before we begin, I'd like to acknowledge the tragic events of August 8th on Maui and in particular in line up. We are so fortunate that all of our employees on Maui are safe. Unfortunately, our line of rent was destroyed. I'm incredibly proud of and thankful for our Maui leadership team who immediately mobilized into action as a tragedy unfolded, providing support to our affected employees, our customers, and the broader Maui community.

Included in the results were 14.7 million of gains from the termination of repurchase agreements.

Included in the results were $14 7 million of gains from the termination of repurchase agreements.

These gains were partially offset by the fail of 159 million of AFS securities that resulted in a loss of 4.6 million.

These gains were partially offset by the sale of $159 million.

<unk> Securities that resulted in a loss of $4 6 million.

The fail of the securities reduced our interest rate and credit risk exposures will improve our net interest income.

The sale of the securities reduced our interest rate and credit risk exposures.

We will improve our net interest income.

During the quarter, we also recognized an $800,000 charge related to a change in the visa class B conversion ratio, which is reported as a contra revenue item in the investment securities agency.

During the quarter, we also recognized an $800000 charge related to a change in the visa class B conversion ratio, which is reported as a contra revenue item in the investment securities gains and losses.

Peter Ho: Here in Oahu, over 100 of our staff have teamed with Hawaii Community Foundation, provide processing support for the Maui Strong Relief Fund, which now totals over $150 million. The recovery of Ohio will take both time and patience. Bank of Hawaii intends to be there every step of the way.

Adjusting for these items, my interest income for the third quarter was $41 million.

Adjusting for these items noninterest income for the third quarter was $41 million.

We expect non-core income to be at a similar level of 41 to 42 million in the fourth quarter.

We expect noncore income.

To be at a similar level of $41 million to $42 million in the fourth quarter.

Peter Ho: Now on to the quarter. We produced another solid financial performance for the third quarter. Averse deposits grew nicely in the quarter. Loan levels were flat. Margin continued to be pressured by the inversion in the curve, although we witnessed a material slowdown in margin erosion compared to the prior quarter. Expenses were well controlled and we improved our capital levels meaningfully. Credit, as Mary will share with you, remains a very good story for us. I'll start off with some commentary on funding and then touch on broader marking additions in Hawaii.

which is unchanged from our prior guidance and an improvement from normalized levels of a year ago.

Which is unchanged from our prior guidance and an improvement from normalized levels of a year ago.

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

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

expenses in the third quarter were 105.6 million, which included several expenses of 2.1 million, and 400,000 of extraordinary expenses related to the Maui wildfire.

Expenses in the third quarter were $105 6 million, which included severance expenses of $2 $1 million and 400000 of extraordinary expenses related to the Maui wildfires.

Mary Sellers: I'll then hand it over to Mary who will discuss credit, including the impact of Lahaina wildfires.

Adjusting for these items, expenses in the third quarter was 103.1 million, a decrease of 900,000 link order and 800,000 from the third quarter of 2022.

Adjusting for these items expenses in the third quarter was $103 1 million a decrease of 900000 linked quarter and 800000 from the third quarter of 2022.

Dean Shigemura: Then Dean will then share with you some more granular color on the financials.

Peter Ho: Why don't we start tang with the deposit market share slide? This is generally where I like to begin. Just to remind the audience that Hawaii is an interesting deposit market. It's a market where effectively five local institutions hold 97% of the bank deposit market share. The data that you're looking at here is the most recent, edition of the FET of the FDIC Annual Summary of Deposits. And unfortunately, we're happy to see Bank of Hawaii right up there at the top, really as a result of a lot of hard work over the past 125 years serving ways, consumers, businesses, and municipalities.

Expenses in the fourth quarter are expected to be approximately the same to slightly lower than the normalized expenses in the third quarter.

While inflation continues to pressure expenses, increases in certain areas are being offset by expense management initiatives that moderate the expense growth.

While inflation continued to pressure expenses increases in certain areas are being offset by expense management initiatives that moderate the expense growth.

Okay.

summarize the we need of our financial performance in a third quarter of 2020.

Summarize the remainder of our financial performance in the third quarter of 2023.

Net income was $47.9 million, and earnings per common share was $1.17. An increase of $1.8 million and $0.05 per share, respectively.

Net income was $47 9 million and earnings per common share was $1 17.

An increase of $1 8 million and <unk> <unk> per share respectively.

A return on common equity was 15.38 percent. In our efficiency ratio was 61.66 percent. We recorded a credit provision.

Our return on common equity was 53, 8% and our efficiency ratio was 61, 6%.

Peter Ho: Today, our deposit balances are 48% consumer, 41% business, and 11% municipal. In terms of deposit makeup, you see that 58% of our deposits are either insured or uninsured but collateralized. The deposits are incredibly long tenured, so more than 50% or 53% are deposits are 20 years or older by relationship, and 75% of our deposits are 10 years or older by relationship. For the quarter, we have a spot increase of 1.4% taking us to 20.8 billion dollars for the third quarter.

We recorded a credit provision.

$2 million this quarter.

The effective tax rate in the third quarter was 24.76%.

The effective tax rate in the third quarter was $24 seven 6%.

and the tax rate for the fourth quarter is expected to be 24.5%.

And the tax rate for the fourth quarter is expected to be 24, 5%.

We continue to grow our capitals from prior quarters and maintain healthy excesses above the regulatory minimum well capitalized requirements.

We continued to grow our capital from prior quarters and maintained healthy excesses above the regulatory minimum well capitalized requirements.

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

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

We did not repurchase common shirt, shares of comments proctor in the quarter.

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

And finally, a board declared a dividend of 70 cents for common share for the fourth quarter of 2023. And I'll turn the call back.

And finally, our board declared a dividend of <unk> 74.

Peter Ho: You'll see here, really, for the balance of 2022, our deposit base has been pretty darn stable. Average balances in the quarter were actually of 2.4%. Average balances were, I want to say, 20.5 billion for Q3 as compared to 20 billion for Q2. Comparing us to the broader national market of what H8 seems as the small banks, you see that on a platform quite nicely versus the broader national competitor set.

Per common share for the fourth quarter of 2023.

Now I'll turn the call back over to Peter.

Thanks, Dan.

So that does it for prepared remarks. And now we'd be happy to answer whatever questions you might have.

So that does it for our prepared remarks, and now we'd be happy to answer whatever questions you might have.

Yes.

At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile the Q&A roster.

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

Okay.

Peter Ho: Onto the funding side of the deposits. Really, we take what we believe is a very unique marketplace. We take a unique market position within that marketplace and take really a brand or leading top of mind brand position within the market to generate meaningful pricing advantages over kind of a median midsize bank. Here, you see that in costs of intersparing deposits. On the next slide, you'll see that that also extends into funding costs for total deposits. And then, obviously, into betas, which are meaningfully lower than our primary revenue set.

Our first question comes from Jeff Roulis with the DA Davidson. Your line is open. Thank.

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

Thanks, Good morning.

Maybe just wanted to check in on deposit flows, a pretty good deposit increase in the quarter. Wanted to see if you get a sense for what of that was maybe from...

Jeff.

Maybe just wanted to check in on deposit flows are pretty good deposit increase in there in the quarter I wanted to see if you could get a sense for.

What of that was maybe from.

potentially local banks tied the Hawaiian electorate or have you seen any kind of, it might be early, but sort of FEMA related inflows, anything as it relates to the pause.

Potentially local banks tied then Hawaiian electric or have you seen any kind of it.

It might be early but sort of FEMA related inflows.

Good evening on as it relates to deposits.

Yeah. Good good question, Jeff. And you saw so.

Yes.

Good question, Jeff and you saw so.

Peter Ho: So, in addition to having a very stable and strong deposit base over the year, we also have built quite meaningfully our tertiary or secondary sources of liquidity. So, here you see, as of the third quarter, our backup liquidity, as we like to say, is up to $9.6 billion. The price of cash security is available, FHLB and or FRB borrowing capacity. And so, this $9.6 billion, as you can see, is well in excess of our uninsured or uninsured and uncollateralized deposit base.

The pauses were pretty elevated on an average basis for the quarter, and then you saw that there was a pretty meaningful spike up there on the spot basis at quarter end, right?

Deposits were pretty elevated on an average basis for the quarter.

And then you saw that there was a pretty meaningful spike up there on the spot basis at quarter end right.

And to your point, some of that was in fact, you know, what I would call Maui while fire related stuff. So some insurance proceeds flowing in. We are starting to see some federal evidence of federal money, state money, county money, kind of lubricating which you can imagine is a pretty dynamic environment.

To your point some of that was in fact, what I.

I'd call Maui wildfire related stuff, so some insurance proceeds flowing and we.

We are starting to see some federal evidence of federal moneys state monies counting monies kind of lubricating.

Which you can imagine is a pretty dynamic environment right now so I would yes, I would say that.

So I would say that, you know, against that spot basis at quarter end, which is plus 300 versus the average for them quarter, you know, maybe upwards of half of that would represent kind of Maui related stuff.

Against that spot basis.

Order and which is plus 300 versus the average flu quarter.

Peter Ho: Switching gears now to the local economy. Performance is remained strong. Unemployment, as of September, was still down below that of the national average. So, at least from an employment standpoint, the state is performing nicely versus... News, our U.S, mainland marketplace. Too early to tell what the impact of the Maui fires will be on employment, but I think we could probably anticipate someone of a step up here. But I think the fact of the matter is the supply of labor will still be challenging relative to the overall demand. And so really, I think what we'll experience on Maui is not so much a lack of worker demand, but just logistics and how to get workers into the right places.

Yes, maybe upwards of half of that would represent.

Maui related stuff.

Now, I, for planning purposes, I would probably reduce that out, but I do think longer term, we're just going to continue to see some of these idiosyncratic inflows and outflows of capital flowing as that situation begins to resolve itself and we move towards a rebuild phase on Mally.

Now.

For planning purposes, I would probably.

Reduced that out, but I do think longer term, we're just going to continue to see.

It's somewhat idiosyncratic inflows and outflows of capital flowing as as that situation begins to resolve itself as we move towards.

A rebuild phase on Maui.

Okay, Peter and appreciate it. I guess related to that just I think that the non-intersparing level is

Okay, Peter and I appreciate it I guess related to that just I think that the noninterest bearing level is.

I mean, you know, in the 26, 27 range, I guess this, if you, if you think that that's some of that is somewhat, well, the flows are...

Correct.

26, 27% range I guess is it.

If you think that that some of that is somewhat while the flows are.

maybe temporary. I'm getting to the point of

Maybe temporary.

Getting to the point of.

Peter Ho: The visitor industry continues to do well. So year to date, the state has experienced nice growth, both in spending as well as arrivals, 10% by spending up 8% by arrivals. Got there in a little bit different way from the recent past. The U.S, market has moderated a bit as we were anticipating, but that has been more than offset by a nice pickup, as you can see in both Japanese visitors and spending as well as by other countries, Canada, Australia, et cetera.

The kind of the bottom of that outflow I think dean has talked about potentially a kind of a bottom.

kind of the bottom of that outflow, I think Dean has talked about potentially a kind of a bottom in the fourth quarter, but I just wanted to check in on non-interest bearing percentages. What do you think that bottoms out at? Yeah, it could be the kind of those wildfire monies.

In the fourth quarter.

But I just wanted to check in on noninterest bearing percentages, where do you think that bottoms out at yes, yes, it could be.

Kind of.

The wildfire monies.

I think, I think portions of that might have been not in spring, not all of it. So that's a little muddy. I would say that as we look at not and despairing for the quarter on average, we were down 2.9% average to average.

I think portions of that might have been diamond spring not all of it. So that's a little money I would say that as we look at noninterest bearing for the quarter on average we were down two 9% average to average four for Q3 that compares to six two.

for Q3, that compares to 6.2% average for Q2 and 6.7% average for Q1. So we definitely are seeing a deceleration there. On an average basis that took our non-digest bearing down to 28.5%. And so I think, you know, I think we are, I'm not sure we're ready to declare victory on bottoming there, but I think we're pretty close to where we're probably at the end.

Peter Ho: In August, the wildfires on Maui were on August 8th. You can imagine that had a pretty meaningful impact to visitor statistics for August. We were down 9% by expenditure and 7% by arrivals, as basically Maui came to a standstill. So Maui for August, as you might imagine, had expenditures decline, just about 50%, arrivals were down 57%, but if you back those numbers out from the overall state, the state was actually still pretty robust at plus 6%, plus 16%, X, Maui.

<unk> average for Q2, and six 7% average for Q1. So we definitely are seeing a deceleration there on an average basis that took our non interest bearing down to 28, 5%.

So I think I think we are I'm not sure we're ready to declare victory on bottoming, there, but I think we're pretty close to where we're we probably at the end.

And it's the last one for me, just a comment on the loan pipeline and kind of expectations of kind of grows into 24.

Okay got it.

The last one for me just.

I'll comment on the loan pipeline and kind of expectations.

Kind of growth into 'twenty four.

Sounds like a pretty moderate environment, but any thoughts?

Sure.

It sounds like a pretty moderate environment, but any thoughts.

in the end of next year. I think modern is the right term, Jeff. Obviously, we think that rate is impacting large parts of the consumer segment.

And the next year, yes.

Yes, I think moderates the right term Jeff.

Peter Ho: Our understanding or our sense for the visitor industry going forward is kind of a ramp up back to a more normal environment post-Lahaina. Lahaina itself really is driven by Khanapali, which is the primary visitor accommodation site in that part of the island. That sector or that region right now is accommodating a number of federal and FEMA employees. So they're fairing well with a little bit different kind of visitor stops than they're used to.

Obviously, we think that rate is impacting.

Parts large parts of the consumer segment.

A fair amount of uncertainty swirling around with geopolitical issues and interest rates, I think getting in the way of a lot of commercial production getting done right now.

A fair amount of uncertainty swirling around with geopolitical issues and interest rates I think.

Getting in the way of a lot of commercial production getting done right now.

And then finally, I think what we've been reading or seeing is a bit of an uptick in sub-prime type lenders finding things a little bit more difficult. Now that doesn't really impact our portfolios as you know, we really don't play in that space.

And then finally.

I think what we've been reading or seeing is.

A bit of an uptick in.

Subprime type.

Lenders, finding things a little bit more difficult.

Peter Ho: The idea or the plan there is to over the course of this year transition from that form of visitor back to the traditional US or international visitor. We'll see how that progresses, but it seems like it sounds like when we're hearing from the hotel side that that is progressing. Other parts of Maui, which were impacted by the Lahaina fire, are beginning to see green shoot, I'd say, of activity, and there is, I think a fair amount of optimism that the those outer lying areas of night will bounce back, or Census, but of course, behind quite expectedly, it has had an impact on the visitor industry. It continues to in a short run, but over the next several months, we're hoping to see a trajectory towards more towards normalization again.

Does it really impact our portfolios as you know, we really don't play in that space.

But I think that kind of that sets up a lending environment that is

But I think that kind of that sets up a lending environment that is really pretty modest and so I would think that if we are flat to slightly up for over the next year that would be.

really pretty modest. And so I would think that if we are flat to slightly up from over the next year, that would be a reasonable outcome for us. Interesting, I'm not quite sure what the rebuild phase looks like, but there may be some opportunities in there, but we'll see. Okay, thank you. Yep, take care.

A reasonable outcome for us.

Interesting I'm not quite sure what.

The rebuild phase looks like but there may be some opportunities in there, but we'll see.

Okay. Thank you take care.

One moment for our next question.

Our next question comes from Andrew Leish with Piper Sandler. Your line is open.

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

Hey, good morning, everyone. Thanks for taking the questions here. Appreciate the margin thoughts here in the near term team, but I'm sure we'll be looking at it going in the next year. I mean, is there a benefit that anything might happen from if we do get another 25 basis point rate high increase given the swaps you've added? How do you think the margin will trend here beyond the fourth quarter?

Hey, good morning, everyone. Thanks for taking the questions here.

I appreciate the margin thoughts here in the near term, but how should we be looking at it going into next year.

Peter Ho: On the next page, you see RevHAR, or RevNOPER available room for state, which continues to be a very positive story and Mary has some slides a little further in the deck to support that further.

Yes.

Is there a benefit that you think might happen from.

If we do get another 25 basis point rate hike increase given the swaps you've added.

Peter Ho: And then finally to finish off with the real estate, residential real estate market here on O'ahu, which is our largest market place. There we see kind of a mixed bag by median sales price. So these are September on September numbers down 4.5% for single family homes, but up 6% for condominiums. But what's interesting is despite a pretty meaningful reduction in sales activity, inventory levels remain extremely low. So months inventory for single family homes at 2.7 months, months inventory for condominiums on O'ahu at 3 months, days on market still well below at 20 and 21 days.

It's really how do you think the margin trend year beyond the fourth quarter.

Yeah, if we do get another rate increase, where it's for right now, we're neutral. Where we benefit is if the Fed is on hold and keeps rates higher for longer. That's where you'll see a margin expansion. What the hedges in place, you know, we've in effect been able...

Yes, if we do get.

Another rate increase where it's.

But right now we are.

Neutral.

Where we benefit is if the fed is on hold and keeps rates higher for longer that's where youll see a margin expansion.

With the hedges in place.

In effect been able to.

neutralized impact from the liabilities side.

Neutralized.

Impact from the liability side.

Got it. All right. That's that's that temple there. And then on the securities lost trade in the quarter.

Got it alright.

Helpful. There and then on the securities loss trade in the quarter.

details behind that. I got so many securities that you sell, any plan or reinvestment you can speak of, and the earn back on that transaction. And then beyond that, like any other plan to do any more law parades, similar to this one.

Some detail behind that I guess, how many securities did you sell.

Any plan.

Reinvestment you can speak of and that the earn back on that transaction and then beyond that like any other plans to do any more work similar.

Mary Sellers: So I'll stop there and now let me turn the call over to Mary, who can share with you some products performance for the third quarter, Mary. Thank you Peter.

Similar to this one.

We continue to look at the market and market conditions and if conditions.

We continue to look at the market and market conditions.

Mary Sellers: Thank you for why is lending philosophy is grounded in two fundamental tenants lending in our core markets of Hawaii and the West Pacific and to longstanding relationships we understand. We combine this with ongoing discipline portfolio management actively exiting those products or segments that have proven to have higher risk profiles. This positions are portfolio for continued lower net charge us through different economic cycles. Our long portfolio is built on long tenured relationships diversified by asset categories with 59% consumer and 41% commercial as appropriately sized exposures and is 79% secured with real estate with a combined weighted average LTV of 55%.

If conditions.

are right, you know, we need to more, but right now we don't have any plans to and don't see any need to.

Our rate we've made this point, but right now we don't have any plans to and don't see any need to.

Regarding the sale, it was a mix of corporates and munis and the payback period is about three years.

Regarding the sale.

A mix of.

Corporates munis and the payback period is about three years for that.

And then what it did give us though, is kind of a relief on the risk-weighted assets fight. So it was a capital-occurative transaction for us.

And then what it did give us though is kind of a relief on the risk weighted asset side. So it was a capital.

Creative.

Transaction for us.

That is helpful. Thanks for taking on the questions, Dr. Back.

Got it alright.

That's helpful. Thanks for taking my questions I'll step back take.

Take care.

The reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. One moment for...

So 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 one moment for our next question.

Mary Sellers: Our commercial real estate portfolio which represents 27% of the total loan portfolio is diversified across the 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 55%. Our office portfolio is granular and has a weighted average loan to value of 56%. 25% of the portfolio is in the downtown Honolulu Central Business District. This segment has a weighted average loan to value of 63% and 47% of the exposure is further supported by repayment guarantees.

Our next question comes from Kelly Mata with KBW. Your line is open.

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

Hi, good morning, Thanks, so much for the question.

I'm looking at your deposit balances. It looks like there was some really nice growth in the savings account.

Hi, Kelly.

Hi, Sue.

Looking at your deposit balances it looks like there was some really nice growth and the same.

So I was wondering if you.

Youre running any promotions at all during the quarter are that help.

Hopefully with that line.

We have been pretty aggressive in that particular space on the consumer side.

We have been.

Pretty aggressive in that particular space.

On the consumer side Kelly.

And we think there's, we think that the spot where we can deliver good value to customer seeking a little more flexibility in their funding, but at the same time getting a quality rate and translates back to us at a rate that is maybe a little bit more palatable than so on the higher on TCD levels. So yeah, that's a good space for.

And we think there's we think that the spot where we can deliver good value to customers seeking a little more flexibility.

Mary Sellers: Two percent of loans in the office segment are maturing through 2024. While not immune from the changing dynamics impacting the office markets across the US, vacancy and rents remain stable in the Oahu office market as conversions to alternative use continue to reduce overall inventory levels as denoted in the great bars. In the last five years alone, approximately one million square feet of inventory has been remodeled.

And they're in their funding, but at the same time getting a quality rate translates back to us.

At a rate that is maybe a little bit.

More palatable than sort of the higher end TCT levels.

So yes, that's a good space for us.

got it. That's helpful. And thank you so much for walking through so much color on the the slots. Just wandering with the 1.8 billion you put on this it

Got it that's helpful. Thank you.

Mary Sellers: Group. Hawaii's supply constraints driven off its unique geography and owners regulatory process serve to create relative stability in our real estate markets over the long term and less volatility during periods of stress. This is particularly pronounced in the housing sector where severely limited supply, again in the grape bars, is compounded by the high cost of home ownership. These two factors continue to drive consistent strong rental demand. Type market conditions also continue to persist in the Oahu industrial market with vacancy rates at historic lows sub 1%.

So much for walking through so much color on that the swaps.

Just wondering with the $1 8 billion you put on this quarter.

What.

What the timing was during the quarter that.

You made those actions and just wondering if that.

Margin guidance includes the full impact or if some of that benefit we're seeing is is.

The full quarter's impact of those.

On that.

That strategy put in place.

Yeah, Kelly, the swaps were put in place kind of throughout the quarter. So it wasn't, you know, ways, it was kind of using a quarter, yeah, average. And then the guidance does include that impact and benefit from that.

Yes, Kelly the swaps were put in place.

Throughout the quarter so it wasn't wait.

It was kind of.

Quarter.

Average.

And then the guidance does include that impact from and benefit from that.

Mary Sellers: Oahu's retail market, whether it's supply chain disruptions, manufacturing shutdowns, backlogs, seaports, and inflation with vacancy and rents returning to pre-pandemic levels. Grocery and drug anchored retail continue to outperform. Despite the protracted delay in the return of the Japanese visitors to pre-pandemic levels, flat inventory levels again help to support occupancy and repart levels. The Hawaiian Islands remain a top five destination in terms of highest revenue per average room and average daily room with Oahu attracting more visitors than any other island in the state.

Got it. That's how long we defined that we did add another 500 and early October . Right. Got it. Got it.

Got it.

Keep in mind that we did add another 500 in early October right got it.

Got it.

And then, I know this is a bit of a ways off, but how should we be thinking about your margin if and when the Fed cuts rates, the KBW baseline, we do have rate cutter too at the end of the year. Just wondering if with those received floating now, put into place if in the,

And then thank God.

This is a bit of a ways off but.

How should we be thinking about your margin.

Jen.

When if and when the fed cuts rates the key BW baseline, we do have a rate cut or two at the end of the year.

Just wondering if.

With those.

Steve floating now put into place.

In the implementation of a rate cut if there could be a near term drag on margin from that.

Mary Sellers: In addition to the continued strength in our markets real estate fundamentals, we have just 8% of our commercial mortgage loans, maturing prior to 2025, minimizing repricing risk in the portfolio. Tail risk in the commercial real estate portfolio remains modest with just 8.8% having an LTV greater than 80%. Our construction portfolio represents 2% of total loans with the primary segment being low income or affordable housing, which continues to be chronically under supply in our markets.

Evan.

That happens.

We don't expect, in fact, we continue to expect that we'll benefit from lower rates under the short end from that rate cut.

We don't expect in fact, we continue to expect that we will benefit from lower rates on the short end.

From rate.

Great cuts.

Got it. Thanks for entertaining the question. I'll step back. Appreciate it.

Got it thanks, thanks for entertaining the questions I'll step back appreciate it great. Thank you Kelly.

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

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

Thank you everyone 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 to me if you have any additional questions or need any further clarification on the topics discussed today. Thanks again, everyone, and have a great day.

Well. Thank you everyone 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 to me. If you have any additional questions or need any further clarification on the topics discussed today. Thanks again, everyone and have a great day.

Mary Sellers: Turning to Maui, Maui represents 11% of the state's population and 11% of the state's real GDP. Our loans in the fire impacted zones of Lahaina and Kula total 169 million or 1% of total loans. The majority of this or 93% is secured with insurance proceeds providing substantial coverage for those properties that were destroyed. After accounting for insurance shortfalls and 50% of land value associated with those properties and a conservative 50% loss rate on unsecured direct and indirect daughter loans, we estimate our potential loss directly related to the area impacted by the fires at 10.8 million.

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

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

Okay.

[music].

Okay.

[music].

Mary Sellers: As the quality remains strong in the third quarter with net charge also 2 million or 6 basis points annualized of total loans and lease outstanding. Up 700,000 or 2 basis points for the link quarter end up 900,000 or 3 basis points year over year. Non-performing assets were 11.5 million or 8 basis points stable from the second quarter and down 2.3 million or 2 basis points year over year. All non-performing assets are secured with real estate with a weighted average loan to value of 56%.

Yes.

Okay.

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Mary Sellers: Loans to link when 30 days or more remained relatively stable at 23 basis points at the end of the quarter. Criticized loans as a percentage of total loans were 2% at the end of the quarter, but down to 1.74% of total loans by the middle of October, as we continue to see improve financial performance in a number of credits, which have been slower to recover from the ancillary impacts of COVID. The allowance for loan relief losses was 145.3 million at the end of the quarter, down 100,000 for the link period, and down 1.2 million from the same period in 22.

Yes.

Sure.

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Yes.

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Dan.

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Yes.

Okay.

Mary Sellers: The ratio of the allowance for credit losses to total loans and leases outstanding was 1.04% at the end of the quarter, flat with the prior quarter, and down six basis points from the comparable period in 2022.

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Dean Shigemura: I'll now turn the call over to you. Thank you, Mary. Net interest income was 120.9 million in a third quarter, the decrease of 3.4 million link quarter. Net interest margin was 2.13%, the decrease of nine basis points, link quarter. Link quarter decreases in both net interest income and margin were primarily due to higher funding costs, partially offset by higher asset yields as the inverted yield curve at higher short term rates continue to pressure income and margin.

Okay.

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Dean Shigemura: We continue to exercise deposit pricing discipline as evidence by our deposit data continuing to perform that of peer banks. As of the third quarter of 2023, our cumulative total deposit data was 26%. We expect our deposit data through the cycle to be 28 to 30%, which is consistent with our prior guidance, but also incorporates the potential that we may, and that we may achieve a modestly lower level. In the third quarter deposit rates exhibited early signs of stabilizing. However, we are continuing to expect a moderate further mix shift from non interest sparing deposits, which represented 27% of our total deposits as of the end of the quarter to interest sparing savings and time deposits.

Dean Shigemura: To better position ourselves for higher for longer interest rates and actively manage our asset duration, we added 1.8 billion notion of pay fixed receive flowed swaps in the quarter to hedge a portion of our fixed rate loan available for sale securities portfolios bringing our total swap portfolio to 2 billion at the end of the third quarter. In October, we continue to improve our position with an additional 500 million notion bringing our current total total swap portfolio to 2.5 billion.

Dean Shigemura: The additional the addition of swaps has increased the floating and adjustable portion of our earning assets to 41% from 27% at the beginning of the year and reduces the risk from higher interest rates. In addition to the hedges that we added in the third quarter net interest income and margin continued to be supported by strong cash flow and overall asset repricing and higher rates. Materities and pay downs of the loan and investment portfolio of 2.8 billion continue to provide an ongoing supplement to the 5.6 billion in assets, which includes our interest rate swap portfolio that reprise annually.

Dean Shigemura: When including the 500 million of additional swaps completed in October, assets repricing annually is 6.1 billion. The yield on fixed rate maturities and paydowns of loans and investments in the third quarter was 3.9% and 2.2% respectively. These cash flows continue to be reinvested predominantly into new loans which are yielding greater than 7% on average or holding cash at the Fed which earns an attractive yield and preserves liquidity. In the third quarter, the strength of our deposits, reliable cash flows and strong liquidity position enabled us to remix our liabilities and reduce non-core funding by 2.2 billion, consisting of 1.2 billion fixed rate SHLB advances, 575 million repurchase agreements and 377 million of public time deposits. In addition to reducing interest expense, these actions reduced our balance sheet leverage and improved our capital position, taking it to consideration the rate environment and the reduction in our balance sheet from these changes.

Dean Shigemura: We expect net interest income will be modestly lower in the fourth quarter, but that net interest margin will increase 3 to 5 basis points. Non-interest income totaled 50.3 million in the third quarter included and the results were 14.7 million of gains from the determination of repurchase agreements. These gains were partially offset by the sale of 159 million of AFS securities, the resulted in a loss of 4.6 million. The sale of the securities reduced our interest rate and credit risk exposures will improve our net interest income.

Dean Shigemura: During the quarter, we also recognized an $800,000 charge related to a change in the visa class B conversion ratio, which is reported as a contra revenue item and the investment securities gains and losses. Adjusting for these items, non-interest income for the third quarter was 41 million. We expect non-core income to be at a similar level of 41 to 42 million in the fourth quarter, which is unchanged from our prior guidance and an improvement from normalized levels of a year ago.

Dean Shigemura: During the third quarter, as is our practice, we managed our expenses in a disciplined manner as inflationary conditions continued. Expenses in the third quarter were 105.6 million, which included several expenses of 2.1 million and 400,000 of extraordinary expenses related to the Maui wildfires. Adjusting for these items, expenses in the third quarter was 103.1 million, a decrease of 900,000 link quarter in 800,000 from the third quarter of 2022.

Dean Shigemura: Expenses in the fourth quarter are expected to be approximately the same to slightly lower than the normalized expenses in the third quarter.

Dean Shigemura: Board of Trustees. While inflation continues to pressure expenses, increases in certain areas are being offset by expense management initiatives that moderate the expense growth. Our return on common equity was 15.38 percent. In our efficiency ratio was 61.66 percent. We recorded a credit provision of $2 million this quarter. The effective tax rate in the third quarter was 24.76 percent, and the tax rate for the fourth quarter is expected to be 24.5 percent.

Dean Shigemura: We continue to grow our capital from prior quarters and maintain healthy excesses above the regulatory minimum well capitalized requirements. During the quarter, we paid out 28 million to common share holders and dividends, and 2 million in preferred stock dividends. We did not repurchase common shares of common stock during the quarter.

Dean Shigemura: And finally, a board declared a dividend of 70 cents per common share for the fourth quarter of 2023. And I'll turn the call back over to Peter. Thanks, Dean.

Unknown Executive: So that does it for prepared remarks, and now we'd be happy to answer whatever question you might have. This time, we'll conduct the question and answer session. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.

Unknown Executive: To withdraw your question, please press star 11 again. One moment will be compiled a Q&A roster.

Jeffrey Rulis: Our first question comes from Jeff Rulis with the D.A. Davidson. Your line is open. Thanks. Good morning, Jeff. Maybe just wanted to check in on deposit flows, a pretty good deposit increase in the quarter. I wanted to see if you get a sense for what of that was maybe from potentially local banks tied to a Hawaiian electorate or have you seen any kind of it might be early, but sort of FEMA related inflows anything on as it relates to deposits.

Jeffrey Rulis: Yeah, good good question, Jeff. And you saw so the positives were pretty elevated on an average basis for the quarter. And then you saw that there was a pretty meaningful spike up there on the spot basis at quarter end, right. And to your point, some of that was in fact, you know, what I would call Maui wildfire related stuff. So some insurance proceeds flowing in. We are starting to see some federal evidence of federal fund money's state money's county money's kind of lubricating which which you can imagine is a pretty dynamic environment right now.

Jeffrey Rulis: So I would yeah, I would say that, you know, against that spot basis at quarter end, which is plus 300 versus the average for them quarter, you know, maybe upwards of half of that would represent. Kind of Maui related stuff. Now, I for planning purposes, I would probably reduce that out, but I do think longer term. We're just going to continue to see because these somewhat idiosyncratic inflows and outflows of capital flowing as that situation begins to resolve itself and we move towards a rebuild phase on Maui.

Jeffrey Rulis: Okay, Peter, appreciate it. I guess related to that, just I think that the non-intersparing level is correct me. You know, in the 26, 27 range. I guess if you, if you think that that's some of that is somewhat, well, the flows are maybe temporary. I'm getting to the point of the kind of the bottom of that outflow. I think Dean is talking about potentially a kind of a bottom in the, in the fourth quarter, but I just wanted to check in on non-intersparing percentages.

Jeffrey Rulis: What do you think that bottoms out at? Yeah, it could be the kind of those wildfire monies. I think I think portions of that might have been on the spring, not all of it. So that's a little muddy. I would say that as we look at non-intersparing for the quarter on average, we were down 2.9 percent average to average for Q3. That compares to 6.2 percent average for Q2 and 6.7 percent average for Q1.

Jeffrey Rulis: So we definitely are seeing a deceleration there on an average basis that took our non-intersparing down to 28.5 percent. And so I think, you know, I think we are, I'm not sure we're ready to declare victory on on bottoming there, but I think we're pretty close to where, where we probably ought to end. Okay, got it.

Jeffrey Rulis: And this is the last one for me, just a comment on the loan pipeline and kind of expectations of kind of growth into, into 24 if you sound like a pretty moderate environment, but any thoughts in the, in the next year. Yeah, I think modern is the right term, Jeff. You know, obviously we think that rate is impacting parts, you know, large parts of the consumer segment. A fair amount of uncertainty swirling around with geopolitical issues and interest rates, I think getting in the way of a lot of commercial production, getting done right now.

Jeffrey Rulis: And then finally, you know, I think what we've been reading or seeing is a bit of an uptick in sub-prime type lenders, finding things a little bit more difficult. Now that doesn't really impact our portfolios, as you know, we really don't play in that space. But I think that kind of that sets up a lending environment that is really pretty modest. And so I would think that if we are flat to slightly up from, you know, over the next year, that would be a reasonable outcome for us. You know, interesting. I'm not quite sure what the rebuild phase looks like, but there may be some opportunities in there, but we'll see.

Jeffrey Rulis: Okay, thank you. Yeah, take care.

Unknown Executive: One moment for our next question.

Andrew Liesch: Our next question comes from Andrew Leish with Piper Sandler. Your line is open. Thank you. Hey, good morning, everyone. Thanks for taking the questions here.

Andrew Liesch: Appreciate the margin thoughts here in the near term, Dean, but I'm actually be looking at it, going in the next year. I mean, is there a benefit that you think might happen from, if we do get another 25 basis point rate, high increase, given the swaps you've added. How do you think the marginal trend here beyond the fourth quarter? Yeah, if we do get another rate increase, where it's for right now, we're neutral, where we benefit as if the Fed is on hold and keeps rates higher for longer. That's where you'll see a margin expansion. What the hedges in place, you know, we've in effect, been able to neutralize impact from the liability side. Got it. All right. That's that temple there.

Andrew Liesch: And then on the securities lost trade in the quarter, just some details behind that. I got so many securities. Did you sell any plan or reinvestment you can speak of and the earn back on that transaction, and then beyond that, like any other plan to do any more loft trades similar to this one. We continue to look at the market and market conditions and if conditions are right, you know, we may do more, but right now we don't have any plans to and don't see any need to.

Andrew Liesch: Regarding the sale, it was a mix of corporates and munis and the payback period is about three years for that. And then what it did give us, though, is kind of a relief on the risk weighted assets, right. So it was a capital, a creative transaction for us. Got it. All right. That is helpful. Thanks for taking on the questions.

Unknown Executive: I'll start back. Thank you. The reminder to ask a question. You will need to press star 11 on your telephone and wait for your name to be announced. One moment for our next question.

Kelly Motta: Our next question comes from Kelly Mata with KBW. Your line is open. Hi. Good morning. Thanks so much for the question. Hi, Kelly. Hi. So I'm looking at your deposit balances. It looks like there was some really nice growth in the savings accounts. I was wondering if you were running any promotions at all during the quarter that helped boost that line. We have been pretty aggressive in that particular space on the consumer side, Kelly.

Kelly Motta: And we think there's, we think that the spot where we can deliver good value to customer seeking a little more flexibility in their, in their funding, but at the same time, getting a quality rate and translates back to us at a rate that is maybe a little bit. More palatable than so on the higher on TCD levels. So yeah, that's a good space for. College. Got it. That's helpful. And thank you so much for walking through so much color on the slops.

Kelly Motta: Just wandering with the 1.8 billion you put on this quarter, what the timing was during the quarter that you made those actions and just wondering if that margin guidance includes the full impact or if some of that benefit we're seeing is the full quarter's impact of those that strategy put in place. Yeah, Kelly, the swaps were put in place kind of throughout the quarter. So it wasn't, you know, ways it was kind of using a full quarter, yeah, average. And then the guidance does include that impact from and benefit from that. Got it. That's how long that we did add another 500 in early October. Right. Got it.

Kelly Motta: And then and then I know this is a bit of a ways off, but how should we be thinking about your your margin when if and when the Fed cuts rates, the KBW baseline, we do have a rate cutter to at the end of the year. Just wondering if with those received floating now put into place if in the implementation of a rate cut, if there could be a near term drag on margin from that, when that if and when that happens.

Kelly Motta: We don't expect in fact, we continue to expect that will benefit from lower rates on the short end from back. Got it. Thanks for entertaining the question. I'll step back. Appreciate it. Great. Thank you, Joey. Thank you.

Cynthia Wyrick: That concludes the question and answer session. At this time, I would like to turn it back to Cindy Wyrick for closing remarks. Well, thank you, everyone, 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 to me if you have any additional questions or need any further clarification on the topics discussed today. Thanks again, everyone, and have a great day. Thank you for your participation in today's conference.

Unknown Executive: This does conclude the program. You may now disconnect. Andrew Liesch, Jeffrey Rulis, Cynthia Wyrick Andrew Liesch, Jeffrey Rulis, Cynthia Wyrick, Peter Ho, Dean Shigemura, Andrew Liesch, Jeffrey Rulis, Cynthia Wyrick,

Q3 2023 Bank of Hawaii Corp Earnings Call

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