Bank of Hawaii Corporation (BOH) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Bank of Hawaii Corporation Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Chang Park, Executive Vice President, Executive Director of Financial Performance and Investor Relations. Please go ahead.

Good morning and good afternoon. Thank you for joining us today for our second quarter 2026 earnings conference call. Joining me today is our President and CEO, Jim Polk, CFO Brad Satenberg, Chief Risk Officer, Brad Shairson; and Manager of Investor Relations, Patricia Lam. Before we get started, I want to remind you that today's conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, the actual results may differ materially from those projected. During the call today, we'll be referencing a slide presentation as well as the earnings release. Both of these are available on our website, boh.com, under the Investor Relations link. And now I would like to turn the call over to Jim.

Thanks, Chang. Good morning, and good afternoon, everyone, and thank you for joining us today. Bank of Hawaii delivered another solid quarter, reflecting continued progress in the underlying earnings power of the franchise. For the second quarter, we reported diluted earnings per share of $1.47 and net income of $63.8 million, up 13% and 11%, respectively, from the prior quarter. Return on average common equity improved to 15.5%. The Net interest income increased to $153.6 million and our net interest margin expanded by 4 basis points to 2.78%. This marked our ninth consecutive quarter of margin expansion. The improvement reflected the continued repricing of our fixed rate assets along with disciplined deposit pricing. Our average cost of deposits remained essentially stable at 127 basis points. The interest rate environment continues to evolve with rates now expected to remain elevated for longer. We believe our balance sheet is well positioned for this environment as higher rates support earning asset yields and the continued repricing of our fixed rate portfolio. At the same time, the competitive environment for deposits remains elevated as customers continue to prioritize yield, which may limit opportunities for deposit cost improvement in the near term. As we have discussed previously, the second quarter is typically a seasonally lower period for deposits at Bank of Hawaii, and this quarter followed that pattern. Average deposits declined modestly from the prior quarter, at quarter end, noninterest-bearing deposits continued to represent approximately 27% of total deposits. Our deposit franchise remains 1 of Bank of Hawaii's most important structural advantages: our leading market position trusted brand, diversified customer base and deep relationships across our markets provides a stable core funding base. These advantages allow us to manage pricing thoughtfully while continuing to meet our customers' needs. Based on our performance through the first half of the year and our current interest rate assumptions, we continue to trend toward a net interest margin approaching 2.9% by year-end. While the composition of margin opportunity has shifted somewhat in the current rate environment, we remain confident in the earnings trajectory of the balance sheet. Turning to lending, total loans increased $94 million during the quarter. representing annualized growth of approximately 2.6%. C&I and residential lending led the increase, while CRE growth was affected by payoff activity and the timing of deal closings. Residential mortgage growth benefited from the completion and closing of a large condominium project. Looking ahead, our commercial pipeline remains encouraging. On the consumer side, however, elevated interest rates and the absence of similar residential project closings are likely to moderate third quarter growth in consumer. We continue to expect full year loan growth in the lower mid-single-digit range. Credit quality continues to be strong, and Brad will provide some additional details shortly. We also made progress on the strategic priorities we discussed last quarter. In Wealth Management, we are strengthening coordination across commercial banking, the private bank, Banco advisers and our broader advisory capabilities. The Center for family business and entrepreneurs, which opened in April, continues to develop its client pipeline around succession and estate planning, business valuation, merger and acquisitions and other complex needs. Bank of Hawaii is uniquely positioned in our markets to bring together capabilities to help clients navigate these consequential financial and business decisions. Beyond these initiatives, our teams remain focused on disciplined execution, protecting our strong balance sheet, deepening customer relationships, investing in our people and technology and supporting the communities we serve. And although the interest rate outlook continues to evolve, the fundamental strengths of Bank of Hawaii remain unchanged A leading deposit franchise, a trusted brand, deep customer relationships, strong credit quality and a conservatively positioned balance sheet. These strengths give us confidence in our ability to perform across a range of economic and interest rate environments. Turning to the economic outlook, Hawaii's economy remains resilient. Supported by low unemployment, healthy visitor spending, strong construction activity and military investment. The Department of Business, Economic Development and Tourism currently projects real economic growth of 1.6% in 2026. At the same time, we continue to monitor inflation, energy costs, consumer confidence, travel demand and broader geopolitical and fiscal developments. With that said, I'll turn the call over to Brad Shearson to discuss credit. Brad Satenberg will then review our financial results in greater detail after which we'll be pleased to take your questions.

Thanks, Jim. I'll begin with an overview of our credit portfolio and conclude with asset quality metrics. And as you will see, our performance has remained strong, consistent with prior quarters. Turning to our lending philosophy. The Bank of Hawaii is dedicated to serving our local communities, lending primarily within our core markets where our expertise allows us to make informed and disciplined credit decisions. Our portfolio is built on long tenured relationships with approximately 60% of both our commercial and consumer clients having been with the bank for more than 10 years. Geographically, our loan book is concentrated in markets we know well. Approximately 94% of loans are based in Hawaii with 4% in the Western Pacific and just 2% on the Mainland primarily supporting existing clients who operate both locally and on the Mainland. Our loan portfolio remains well balanced between consumer and commercial exposure. Consumer loans represent 56% of total loans or approximately $8 billion. Within the consumer portfolio, 86% consists of residential mortgage and home equity loans with a weighted average LTV of 29% and weighted average FICO score of 799. The remaining 14% of consumer loans are comprised of auto and personal lending. Credit quality in these segments also remained strong with FICO scores of 729 for auto loans and $7.61 for personal loans. Turning to commercial lending. The portfolio totals $6.2 billion, representing 44% of total loans. 72% is secured by real estate with a weighted average LTV of 55%. This reflects our ongoing emphasis on collateral protection. CRE remains our largest component of the commercial book totaling $4.3 billion or 30% of total loans. And in Oahu, the state's largest CRE market, a combination of consistently low vacancy rates and flat inventory levels continues to support a stable real estate market. Across industrial, office, retail and multifamily property types, vacancy rates remain below or close to their 10-year averages. Total office space on Oahu has declined by approximately 10% over the past decade, driven primarily by conversions to multifamily residential and lodging. This structural reduction in supply, combined with the return to office trend, has brought vacancy rates back down to the long-term average and well below national levels. Our CRE portfolio remains well diversified with no single property type exceeding 9% of total loans. Conservative underwriting practices continue to be applied consistently with weighted average LTVs below 60% across all CRE categories. In addition, diversification within each segment remains strong, supported by modest average loan sizes. Scheduled maturities are also well balanced with more than 60% of CRE loans maturing in 2030 or later, reducing near-term refinancing risk. Looking at the distribution of LTVs, there isn't much tail risk in our CRE portfolio, less than 3% of CRE loans have greater than an 80% LTV. C&I accounts for 12% of total loans, totaling $1.7 billion. This portfolio is diversified across industries characterized by modest average loan sizes, and there is very little leverage lending. Turning to asset quality. Overall credit performance remained strong and consistent with the trends we've seen over the past several quarters. delinquencies, nonperforming assets and net charge-offs all remained at favorable levels during the quarter. Net charge-offs were just $3.4 million or 10 basis points annualized in line with the last several quarters, but up from the abnormally low 3 basis points last quarter that resulted from a large recovery. Nonperforming assets declined 1 basis point to 8 basis points, while delinquency levels increased 1 basis point to 41 basis points. The 1 notable change this quarter was an increase in the criticized asset ratio to 2.81% and from 2.12%. That increase was driven by a single borrower relationship rather than broader weakness across the portfolio. The loans related to the borrower continue to perform and the exposure is well secured by real estate. More broadly, 93% of our criticized assets are secured by real estate with a weighted average LTV of 58%. And as an update on the allowance for credit losses on loans and leases, the ACO ended the quarter at $147 million, flat to the linked quarter. The ratio of our ACL to outstandings ends down 1 basis point to 1.03%. This concludes my remarks. I will now turn the call over to Brad Satenberg, for a discussion on our financial performance.

Thanks, Brad. For the quarter, we reported net income of $63.8 million and a diluted EPS of $1.47, up $6.4 million and $0.17 per share from the linked quarter. And as Jim mentioned, for the ninth consecutive quarter, both our NII and NIM expanded. Compared to the first quarter, NII increased $2.6 million and NIM improved 4 basis points to 2.78%. The expansion was primarily driven by our fixed asset repricing, partially offset by the deposit mix shift, which accelerated for the first time in several quarters. Despite the increase this quarter, the broader trend remains positive, and over the past 12 months, the aggregate mix shift was only $17 million compared to $516 million during the same period a year ago. The yield on earning assets improved by 5 basis points during the quarter which benefited from a $2.8 million contribution to our NII from the fixed asset repricing, assuming that interest rates remain stable, I expect that the yield on our earning assets will continue to improve at a similar pace for the remainder of the year. The cost of interest-bearing liabilities increased by 1 basis points during the quarter, consistent with the rise in deposit costs. Deposit costs were 1.27% in the deposit data declined slightly to 35.5%. As interest rate expectations have shifted, deposit pricing has become more competitive than earlier in the year, contributing to the higher deposit mix shift, along with a modest increase in deposit costs this quarter. In the current RAIN environment, I expect our cost of deposits to settle in the range of 1.25% to 1.3% in the near term. I also expect public deposits to decline in the third quarter as we strategically allow certain higher cost funds to run off. I'm forecasting that any interest rate hikes would initially benefit NII and NIM, but would ultimately become a modest headwind once our deposits fully reprice. The velocity of the impact from any change in rates will depend on the timing of deposit pricing adjustments and the terminal beta reached. I expect the deposit beta of any potential rate hikes to ultimately land at approximately 34%, which would mirror our beta from the last rate hike cycle. Regardless of any potential rate changes, I believe that we are well positioned to remain balanced from an interest rate sensitivity perspective. At quarter end, our fixed to flow ratio was 58%, down 1 percentage point from the prior quarter. We finished the quarter with an active pay fixed received float swap portfolio of $1.4 billion with a weighted average fixed rate of 3.3% and an average life of 1.4 years. $1 billion of these swaps hedge our loan portfolio if $400 million hedge our securities. In addition, we have $200 million of forward starting swaps with a weighted average fixed rate of 3% and an average life of 2.1 years. These swaps will become effective during the third quarter. Noninterest income was $43.3 million during the quarter compared to $41.3 million during the linked quarter. This quarter included a $400,000 charge related to our BCP conversion ratio change, while the first quarter included a similar $200,000 charge. Adjusting for these normalizing items, noninterest income was up $2.2 million. This improvement was primarily due to the strength of our Wealth Management division, which benefited from a strong market as well as increased customer demand for annuity investments and other advisory-related fees. My forecast for the third quarter is that normalized noninterest income will be approximately $43 million. Noninterest expense was $111.2 million compared to $116.1 million during the linked quarter. As a reminder, the first quarter included a seasonal payroll tax and benefits charge of $2.8 million as well as nonrecurring charges related to the accelerated vesting of restricted stock awards of $3.5 million an unrelated severance charge of $750,000. This quarter includes our annual merit increases of approximately $1.2 million and a $500,000 benefit in connection with the net forfeiture of unvested restricted stock. Excluding the impact of these items, expenses were up slightly compared to the first quarter. Third quarter normalized noninterest expense is expected to be approximately $112.5 million. During the quarter, we also recorded a provision for credit losses of $3.6 million, resulting in a coverage ratio of 1.03%. The -- in addition, we reported a provision for taxes of $18.3 million during the quarter resulted in an effective tax rate of 22.3%. The drop in the tax rate compared to the linked quarter was primarily due to higher benefits from certain tax-advantaged investments. Our capital ratios remained above the well-capitalized regulatory capital thresholds during the quarter with Tier 1 capital and total risk-based capital of 14.5% and 15.5%, respectively. And consistent with the linked quarter, we paid dividends of $28 million on our common stock and $5.3 million on our preferreds. During the second quarter, we repurchased $17 million of common shares at an average price of approximately $78 per share. I am currently planning to purchase an additional $20 million of stock during the third quarter. And $89 million remains available under the current repurchase plan. Finally, the Board declared a dividend of $0.70 per common share that will be paid during the third quarter. Now I'll turn the call back over to Jim.

Thanks, Brad. We'd now be happy to answer any questions that you might have.

[Operator Instructions] Our first question comes from the line of Jeff Rulis with D.A. Davidson.

Jim, you alluded to in your initial remarks on the wealth management momentum and Brad kind of followed with the pieces of that strength. I just kind of want to see what is pretty solid for trusted in asset management. If -- what kind of growth do you see the rest of the year, I guess, if you strip out, I guess, the strong market is a variable. But just wanted to see the outlook for that line item as you said.

Yes. I mean, it's always hard to judge these things with market conditions, but we feel really good about where we're at. Obviously, we've talked on several calls now, just about the investments we've made in both Banco advisers as well as the overall wealth platform. I would say that if you looked at the performance in Q3 on the wealth management side, the increase in fees was driven probably half by market and half by production. And then we had some trust and testamentary fees that came in as well. So I would see that as sustainable without market change going forward. And then on the Banco advisory side, the annuity income is really -- I think you're really beginning to see sort of the partnership with Sotera, the greater efficiency that we've incorporated into the business. additional products that we have availed through the segment and then the advisers that we're adding to the team just helping to drive overall sales.

Appreciate it. And then 1 other 1 I had is just to check in on that margin, you mentioned the high 2% or approaching 2.9 by year-end. On -- and it sounded like the composition of how you get there shifted a little bit. And just I guess if you couched this quarter's sequential increase in how you get there, if you could just provide a little more color through the back half of how you get there would be helpful.

Sure. Maybe I'll have Brad answer that question.

Yes. Thanks, Jeff. That's a good question. So our NIM for the quarter was $2.78. June was at $279 million, now we're forecasting 1 rate hike this year, mid-September is what we have in our forecast. So all of the components are still in place for the NIM to continue to grind higher. We've got the fixed asset repricing, which we feel really good about. And the mix shift has moderated even though we took a step back this quarter, really, if you look at over the longer-term trend, it's been positive. So with the rate hike and with the mix shift and with the fixed asset repricing, I think we get to $290 million by the end of the year. And that's -- I think we're looking at 5 basis points in NIM per quarter going forward?

And Brad, just to clarify, that's a true exit, not the quarterly average in Q4?

Yes. So I think it's going to be -- yes, my expectation is December would be just about $290 million.

Sounds good. Thank you. step back. Thanks.

Our next question comes from the line of Matthew Clark with Piper Sandler.

Maybe just a little more on the margin. If you had the spot rate on deposits at the end of June and how you're RECONNECT -- and I was just -- as a follow-on to that, just how you're -- whether or not you're having to make any tweaks on exception pricing here, any upward priority changes to your promotional rates?

All right. So the spot is to answer your first question, Matt, the spot rate was $1.26. So it was down 1 basis point from what our cost was for the quarter. And as far as exception pricing, obviously, I think competition has increased slightly, and I think there are some additional requests for some exception pricing. But it hasn't been material or significant -- but we are looking at opportunities to grow deposits. And with that comes some additional pricing on our CDs. So we do think we're going to be pushing CD rates up slightly in the 3- and 12-month categories. But -- nothing material, but we do see that moving up.

Okay. And then just on the securities portfolio down this quarter, should we continue to assume that shrinks or are you going to start reinvesting there?

And I want to -- is going to shrink. But I think this quarter, between the loan growth that we experienced as well as we had some deposit runoff, so we used the excess cash flows from the investment portfolio to support those to -- but we did take a step back in our investments, and I think we'll just continue to reinvest at a pace, and it will only be dictated by what we see from a loan growth perspective -- from a loan growth standpoint.

Our next question comes from the line of Jared Shaw with Barclays.

I guess sticking with the deposits, was there anything unique about the DDA trends this quarter? -- maybe apart from some of the public funds? And how are you thinking about sort of DDA as a component of growth going forward?

Yes. I think the way I would characterize it is, obviously, the quarter was down. But if you look over the last several quarters, we've grown consistently. I just went back 5 quarters. We've had really nice growth going back to the beginning of 2025, and we had particularly strong growth in and in Q1 of '26. So I really look at -- particularly on the NIBD side is just sort of the normal ebbs and flows and the seasonality of Q2. There were some project-related funds that built up related to some of the condo stuff that moved out. But we're confident that the long-term sort of trend and sustainability of growth in the space still remains.

Okay. All right. And then -- on the buyback, thanks for the update on the $20 million expected for third quarter. Is that quarter given capital and growth dynamics? And is that a good level to sort of assume for the next few quarters beyond third quarter?

Yes, this is Brad. I would say, obviously, $20 million for the third quarter. I would expect $20 million for the fourth quarter as our forecast and our expectation, and then we're going to reevaluate it going into 2027.

Our next question comes from the line of Andrew Terrell with Stephens. If I can go back to just the loan growth quickly. I think you mentioned in the prepared remarks, kind of the low, mid-single-digit kind of goalpost was still where you were looking for kind of full year loan growth. I heard some of the comments around just maybe some tougher consumer in the third quarter. I'm hoping you could just talk to maybe how the pipeline is building up overall, specifically on the commercial side? What gives you confidence in growth that I think the guide imply is stable to maybe improving growth in the back half of the year.