Bank of Hawaii Corp. 2026 Q3 Earnings Call

Please go ahead. Good morning and good afternoon.

Thank you for joining us today for our third 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 will 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. Now, I would like to turn the call over to Jim.

Thanks, Chang. Good morning and good afternoon, everybody, and thank you for joining us. Bank of Hawaii delivered another solid quarter reflecting continued improvement in our financial performance, the underlying strength of our franchise and our disciplined balance sheet management. For the third quarter, we reported diluted earnings per share of $1.49 and net income of $64.3 million, up 0.7% and 1.4% respectively from the prior quarter, and up 24.2% and 20.5% when compared to the third quarter of 2025. Return on average common equity was 15.4%. Our results continued to benefit from the repricing of our earning assets, supported by the strength of our deposit franchise, sound credit quality and disciplined expense management. While encouraged by our progress, our focus remains on sustaining this performance while strengthening the drivers of longer term earnings growth.

Turning to our results, net interest income increased to $156.1 million and our net interest margin expanded by four basis points to 2.82%, marking our tenth consecutive quarter of expansion in both measures. The cumulative improvement in our margin has been an important contributor to our earnings growth, and we continue to see opportunities for additional repricing. At the same time, we recognize that sustaining earnings growth over the longer term will require a greater contribution from organic deposit, loan and fee income growth. While we remain mindful of the evolving interest rate environment and competitive landscape, our focus continues to be on maintaining a stable, high quality deposit franchise, preserving balance sheet flexibility and generating attractive risk-adjusted returns. Average deposits declined 0.8% for the quarter, largely reflecting the normal deployment of customer liquidity associated with completed real estate projects, distributions to owners and working capital needs.

We also made a deliberate decision to reduce certain higher cost public deposits towards the quarter end, which impacted the end of quarter spot balance. Despite the competitive environment, our average cost of deposits remained stable at 1.27%, while non-interest-bearing deposits continued to represent roughly 27% of total deposits. Customer activity and deposit pipelines remain healthy, and based on what we see today, we anticipate returning to modest deposit growth in the fourth quarter. On the lending front, total loans increased by $85 million, or 0.6% for the quarter, 2.4% annualized. Commercial loans increased by $73 million or 1.2%, supported by healthy customer activity and solid pipelines. While consumer lending grew marginally reflecting the ongoing impact of higher interest rates, particularly in residential lending. Looking ahead, we anticipate overall loan growth to continue in the low mid-single digit range, with commercial lending being the primary driver of growth.

Credit quality remains a fundamental strength of Bank of Hawaii, and our disciplined approach to underwriting and portfolio management continues to serve us well. Brad Shearson will provide additional commentary on this shortly. I also want to highlight our continued progress in wealth management, where targeted investments over the past several years have been driving a meaningful improvement in results. For the nine months ended 9/30/2026, trust and asset management fees and annuity and insurance fees totaling $45.2 million increased by 11.5% over the same period in 2025. We are seeing the benefits of the investments we have made in Bankoh Advisors as well as in our trust and asset management businesses. We also see opportunities through stronger coordination between commercial banking and wealth management, particularly through our Center for Family Business & Entrepreneurs.

Helping business owners navigate wealth planning, succession and ownership transition represents an important opportunity to deepen relationships and generate additional fee income going forward. Beyond our quarterly results, we remain focused on strengthening organic growth across the franchise. Bank of Hawaii benefits from a leading deposit market share position, longstanding customer relationships, and a trusted brand built over more than 125 years. Today, we hold over 34% of the bank deposit market and have expanded our market share by 6.7% over the last 20 years. These are important advantages, however, we believe there is an opportunity to translate them into even stronger organic growth across the franchise. Our focus is on deepening existing relationships, capturing greater share of our customers' financial needs, and becoming more effective at attracting new customers.

Across commercial banking, wealth management, and retail banking, we see opportunities to broaden relationships and better leverage the strength of our franchise. Turning briefly to the local economy, Hawaii continues to demonstrate resilience, although growth remains modest. Current forecasts call for low single-digit real GDP growth in 2026, with growth projected at 1.6% for 2027. Unemployment remains low at 2.8%. Tourism results have been mixed as of late. Through August, visitor arrivals and spending were above prior year levels, despite a softer weather-affected August. While military construction activity, public investment, and military spending continue to provide meaningful support to the economy. With that said, we continue to monitor inflation, energy costs, and interest rates, particularly their impact on consumer spending, business investment, and visitor demand. Overall, we view Hawaii as a stable but modest growth market.

This reinforces the importance of expanding our customer relationships and market penetration rather than relying primarily on underlying economic growth. As I reflect on the quarter and our progress this year, I am encouraged by the continued improvement in our financial performance and the strength of our franchise. Our near-term focus is on sustaining that momentum, while our longer-term opportunity is to translate our competitive advantages into stronger organic growth and greater operating efficiency. We will pursue these opportunities thoughtfully, maintaining the financial and risk management discipline that has long characterized Bank of Hawaii. With that, I'll turn the call over to Brad Shairson.

Thanks, Jim. I'll begin with an overview of our credit portfolio and conclude with asset quality metrics. As you'll 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 91% of our loans are based in Hawaii, with 5% in the Western Pacific and 4% on the mainland, primarily supporting clients in our market that also have operations on the mainland. Our loan portfolio remains well-balanced between consumer and commercial exposure.

Consumer loans represent 56% of total loans, or approximately $8.1 billion. Within the consumer portfolio, 86% consists of residential mortgage and home equity loans, with a weighted average LTV of 49% and weighted average FICO score of 798. The remaining 14% of consumer loans are comprised of auto and personal lending. Credit quality in these segments also remains strong, with average FICO scores of 730 for auto loans and 763 for personal loans. Turning to commercial lending, the portfolio totals $6.3 billion, representing 44% of total loans. 73% is secured by real estate with a weighted average LTV of 55%. This reflects our ongoing emphasis on collateral protection. CRE remains the largest component of the commercial book, totaling $4.5 billion, or 31% of total loans.

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. Our CRE portfolio remains well-diversified, with no single property type exceeding 10% 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. Given the recent rise in interest rates, I will also mention that interest rate sensitivity is an important consideration in our underwriting process.

Where appropriate, we evaluate borrowers under stress rate scenarios to assess their ability to absorb higher debt service costs. This helps us understand repayment capacity not only under current conditions, but also under a range of potential rate environments. Looking at the distribution of LTVs, there isn't much tail risk in our CRE portfolio. Just 2.3% of CRE loans have greater than an 80% LTV. C&I accounts for 11% of total loans, totaling $1.7 billion. This portfolio is diversified across industries, characterized by modest average loan sizes, and there is very little leveraged lending. Turning to asset quality, overall credit performance remains strong and generally in line with the trends we've seen over the past several quarters. Delinquencies and net charge-offs remained at favorable levels during the quarter at 46 basis points and 9 basis points, respectively. In addition, criticized assets declined by 44 basis points from 2.81% to 2.37%.