Bank of Hawaii Corporation Second Quarter 2026 Earnings Conference Call

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 ACL ended the quarter at $147 million, flat to the linked quarter. The ratio of our ACL to outstandings ends down one basis point to 1.03%. This concludes my remarks. I will now turn the call over to Brad Sattenberg 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 17 cents per share from the LING 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 four basis points to 2.78%. The expansion was primarily driven by our fixed asset repart pricing, 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 five 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 one basis points during the quarter, consistent with the rise in deposit costs. Deposit costs were 1.27%, and 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 the modest increase in deposit costs this quarter. In the current rain environment, I expect our cost of deposits to settle in the range of one and a quarter 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 MIM, but would ultimately become a modest headwind once our deposits fully repriced. 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-float ratio was 58%, down one 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, while $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. Non-interest income was $43.3 million during the quarter compared to $41.3 million during the link quarter. This quarter included a $400,000 charge related to our Visa B conversion ratio change, while the first quarter included a similar $200,000 charge. Adjusting for these normalizing items, non-interest 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 non-interest income will be approximately $43 million. Non-interest expense was $111.2 million compared to $116.1 million during the link quarter. As a reminder, the first quarter included a seasonal payroll tax and benefits charge of $2.8 million, as well as non-recurring charges related to the accelerated investing and restricted stock awards of $3.5 million and 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 non-interest 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%. 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 link 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 link 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 we 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.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jeff Rulis with DA Davidson.

Your line is now open. thanks good morning hey good morning jeff uh jim you alluded to in your uh initial remarks on the the wealth management momentum and brad kind of followed with the pieces of of that strength i just kind of want to see what pretty solid for trusted asset management if uh what kind of growth do you see the rest of the of the year i guess if you strip out i guess the strong market is a variable, but I just wanted to see the outlook for that line item as you see it.

Yeah, 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 Advisors 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 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 I would see that as sustainable without market change you know going forward and then on the Banco Advisor side the the annuity income is really I think you're really beginning to see sort of the partnership with Cetera the greater efficiency that we've incorporated into the business additional products that we've availed uh through the segment and then uh the advisors that we're adding to the team just

helping to drive overall sales appreciate it uh and then one other one i had is just to check in on that margin you mentioned the the high uh two percent are approaching two nine by by year end and it sounded like the composition of how you get there shifted a little bit and and just i guess if you couch 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, it would be helpful.

Sure, maybe I'll have Brad answer that question.

Yeah, thanks, Jeff. That's a good question. So our NIM for the quarter was 278. June was a 279. Now, we're forecasting one rate hike this year. Mid-September is what we have in our forecast. So all the components are still in place for, you know, the NIM to continue to grind higher. You know, we've got the fixed asset repricing, which we feel real good about. And the mixed shift, you know, 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 mixed shift and with the fixed asset repricing, I think we get to, you know, 290 by the end of the year. And that's, you know, I think we're looking at, you know, five basis points in NIM per quarter going, you know, forward.

And Brad, just to clarify, that's a true exit, not the quarterly average in Q4 of 290.

Yeah, so I think it's going to be, yeah, my expectation is December would be just about 290.

Sounds good. Thank you. Step back.

Our next question comes from the line of Matthew Clark with Piper Sandler. Your line is now open.

Hey, good morning, everyone. Good morning. Maybe just a little more on the margin, if you had the spot rate on deposits at the end of June. And I was just going to, as a follow-on to that, just whether or not you're having to make any tweaks on, you know, exception pricing here, any upward pressure there, any changes to your promotional rates.

All right. So the spot, just to answer your first question, Matt, the spot rate was $120. So it was down one 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, you know, material or significant. But we are looking at opportunities to grow deposits. And with that, you know, 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, you know, nothing material, but we do see that moving up.

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

I mean, I wouldn't assume it's going to shrink, but I think this quarter, you know, between the loan growth that we experienced as well as, you know, we had some deposit runoffs. So we use the excess cash flows from the investment portfolio to support those two. But, you know, we did take a step back in our investments, and I think we'll just continue to, you know, reinvest at a pace, and it will only be dictated by, you know, what we see from the loan growth perspective, from the loan growth standpoint.

Got it. Thank you.

Thank you. Our next question comes from the line of Jared Shaw with Barclays. Your line is now open.

Hey, Jared. Good morning. 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?

Yeah, I think the way I would characterize it is, you know, obviously the quarter was down, but if you look over the last several quarters, we've grown consistently. You know, I just went back five quarters. We've had really nice growth going back to the beginning of 2025, and we had particularly strong growth in Q4 and in Q1 of 26. So I really look at, particularly on the NIBD side, as just sort of the normal ebbs and flows in the seasonality of Q2. There were some project-related funds that built up related to some of the condo stuff that moved out. But, you know, we're confident that the long-term sort of trend and sustainability of growth in the space still remains.

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

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

Okay. Thank you.

Thank you. Our next question comes from the line of Andrew Terrell with Stevens. Your line is now open.

Hey, good morning.

Good morning.

If I could 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. You know, what gives you confidence in, you know, growth that I think the guide implies, you know, stable to maybe improving growth in the back half of the years?

Yeah, so, you know, on the residential side or on the consumer side, you know, overall production was quite strong relative to our recent history a component of that maybe 25% of the total production was related to a condominium project that closed out this quarter so that gave us some extra juice on the residential side to maybe drive some I'll use the term outsized performance at least relative to our recent history so without any projects in the near horizon will kind of go down to a more organic level of growth in residential. It'll still be positive, but it's not going to be nearly the level it was for Q2. And, you know, we continue to see challenges in indirect and home equity, just given the rate environment and sort of the realities of cost of cars and financing of cars and so forth. So, but it'll be positive for the quarter and it'll contribute to sort of the guide that I've already provided. The commercial side's looking pretty good. I mean, the pipeline, we really started to see the pipeline build out in the beginning part of the year. Q1 was a solid quarter. Q2, you know, we were expecting a little bit better performance, but we had some deals move out to the third quarter. We've seen those close already and the pipeline remains, you know, pretty good from my standpoint healthy. So I feel pretty good about commercial growth, and I think the combination of those, you know, what we see on the commercial side as well as consumer will keep us in that low, mid-single-digit range.

Okay, great. And then just one on the margin, just to confirm the expectation for 290 exit rate of the year, that does include the assumption for the September rate hike of 25 basis points in there. And then I was hoping you could talk to, we heard, you know, some around the competitive dynamics, on the deposit side, just competition for new loans today and your comfortability with, I think, your kind of blended reinvestment yield for the fixed and adjustable cash flows was still, you know, 160 basis points this quarter, same as last quarter. Your comfortability with that, you know, remaining relatively stable moving forward.

There was a lot in there. Can you repeat that again just to make sure we're answering your question correctly?

Yeah, I'm sorry. Okay. Does the 290 exit margin include the 25 basis point September hike?

That's correct. Yeah. So, we're expecting mid-September to have one hike, 25 bps.

Okay. And then competition for new loans today, do you feel like there's any risk to that incremental spread on page 20 of the deck, you know, 160 basis point pickup for the maturity an adjustable cash flow reinvestment? Do you feel like there's any risk of spread compression there?

No, I don't see that at this point. I mean, spreads have been pretty stable for a while on the loan side. I mean, as we've said in previous quarters, there's always a one-off, but the market remains pretty rational.

Okay, thank you. Thank you. Our next question comes from the line of Andrew Leisch with Stonex Group. Your line is now open.

Hey, everyone. Hey, good morning, Andrew. I just want to see, just kind of looking at the size of the average earning asset base here going forward. Have you seen deposits come back in seasonally this quarter? And it also sounds like you're going to have some other public funds outflows. So I guess, how should we be thinking about where earning assets shake out?

Well, I'll start, and then Jim can chime in. This is Brad. Yeah, our earning assets, our average earning assets definitely took a step down from previous this quarter, and I expect it to come in probably in the range of 100 to 200 million this quarter, so relatively consistent where we ended this past quarter.

All right, that's helpful. And then just on the – yeah, go ahead, sorry.

No, I was just going to add, I think one of the things that we see out there, particularly in the deposit space, is sort of the higher-cost public deposit. So we're going to take a pretty strategic approach on how we look at those things, and that could have an impact on the ultimate earning asset base.

That makes sense. Okay. And then just on the income, did I hear you're currently like $43 million for the third quarter?

That's correct.

Okay. So if I take the 43.3 this last quarter, if I back out the securities loss there, I mean, you're kind of close to 44.3 million, I mean, or 44 million. I guess where does, I mean, what's going to cause the step down here, especially given the good commentary on the wealth side?

Well, it's really not a step down. I mean, if you think about those securities losses, really what those are, the Visa B conversion ratio. Right, right. And so those are consistent quarter to quarter. And so the 43 million is really just consistent to where we finished the second quarter. So it's really a step up from the first quarter and sort of remaining relatively flat from the second quarter.

Okay, got it. That's a good way to think about it. Thanks so much. I'll step back.

Thank you. As a reminder, to ask a question at this time, please press star 11 on your touchstone telephone. Our next question comes from the line of Kelly Mata with KBW. Your line is now open.

Thank you so much for the question. It seems like based on Q2 results as well as your expense guide of $112.5 million in Q3, that you're running below, or at least at the lower end, the 2.5% to 3% expense guide range you had previously given. Can you provide any color or context to the drivers of that, and if there's any updated color on how you see expenses coming in for the year?

Yeah, I think the 2.5% to 3% is still consistent. And the way I look at it is our normalized non-interest expense going into the year was $435 million. So we're just adjusting for normalizing items. And so at 3%, it should come in about $448 for this year. And so I'm thinking on average, quarter by quarter, it's about $112 million. And so the first two quarters, we came in slightly below that. I'm expecting the third and fourth quarter to come in in that $112.5 range, which would land us at the end of the year right at about 3% from that normalized level I was just referencing.

Got it. Okay, that's helpful. And then with the government deposit being strategic there, can you quantify how large that is in your deposit base? And kind of what within that, I'm sure there's some operating accounts, what within that is the target for strategic production?

So, our public deposits are about $2 billion of our total deposit base. And my expectation is this quarter for us, as far as running off public deposits, about 10% to 15% of those should run off, and those would be high-cost deposits. So, when I say high-cost, I'm thinking somewhere in the range of, you know, 3.5% to 4%.

Okay. Got it. That's helpful. And then just if I could ask one more, when we step back and think about the margin longer term, I think, you know, you've reiterated that 290 by year end, which now includes the rate hike, which I understand is beneficial in your term, but maybe more neutral longer term. As we think about that 325 to 350 normalized margin, any puts or takes in terms of the timeline of getting there? Is that still kind of how we're thinking about it and kind of this change rate environment? Or are there any other considerations to note?

You know, the way I look at it is we're still on that trajectory. Depending on what happens in interest rates, there's a lot of variability. This is, you know, still a couple years down the road, as we've talked about, but I don't see anything, you know, sort of at this point in time that would, you know, deviate, that would cause us to deviate materially from that.

Got it.

Thank you. And I'm currently showing no further questions at this time. I now like to hand the call back over to Patricia Lam for closing remarks.

Thank you, everyone, for joining us today and for your continued interest in Bank of As always, please feel free to reach out to us if you have any additional questions.

This concludes today's conference. Thank you for your participation. You may now disconnect.