Earnings Call Transcript - BOH Q4 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the Bank of Hawaii Corporation Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jennifer Lam, Senior Executive Vice President, Treasurer and Director of Investor Relations. Please go ahead.

Jennifer Lam, Senior Executive Vice President, Treasurer and Director of Investor Relations

Thank you. Good morning, good afternoon, everyone. Thank you for joining us today. On the call with me this morning is our Chairman, President and CEO, Peter Ho; our Chief Financial Officer, Dean Shigemura; and our Chief Risk Officer, Mary Sellers. 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, we'll be referencing a slide presentation as well as the earnings release. A copy of the presentation and release are available on our website, boh.com, under Investor Relations. And now, I'd like to turn the call over to Peter Ho.

Peter Ho, Chairman, President and CEO

Thank you, Jennifer. Good morning or good afternoon, everyone. We appreciate your interest in Bank of Hawaii. The bank achieved another solid quarter of performance to end the year. Loans grew 2.4% on a linked basis and 11.3% year-on-year, reflecting balanced growth across our corporate, commercial and consumer businesses. Deposits were down 1.3% from the prior quarter, but up 1.3% from a year ago. At quarter-end, our total deposit beta was 11.5% cycle-to-date, reflecting the diversified, granular, and seasoned nature of our deposit base. By segment, our deposits are 50% consumer, 42% commercial, and 8% public. The only half, or 47%, of our consumer and commercial deposits come from accounts under $0.5 million in account size, and 73% of our deposits have a tenure of 10-plus years or more with Bank of Hawaii. Expenses were well controlled. Credit quality remains excellent. Return on average common equity was 21.3% for the quarter. As is our custom, I will now walk through local market conditions, and then hand the call over to Dean, who will delve deeper into the financials, and then Mary Sellers will touch on credit for the company. At that point, we'd be happy to entertain your questions. Now, moving on to Slide 3. You can see that the economy, and namely employment, continues to improve in the islands. The November state unemployment rate was 3.3%, marking the second straight month that it's outperformed national unemployment as a whole. Prior to October, the state of Hawaii unemployment had been higher than the national average for 29 consecutive months. The visitor sector continues to perform well. While arrivals remain down from pre-pandemic levels as a result of the continued lag in the international, and in particular, Japanese visitor segments, overall visitor days are nearly at par to pre-pandemic levels, as visitors are visiting longer overall and the mix shift of visitors is tilting towards traditionally longer-staying segments. On Slide 5, you can see that RevPAR is performing well ahead of pre-pandemic levels, which has helped push overall visitor expenditures 40% higher than pre-pandemic levels on a year-to-date basis. Finally, values in the Oahu housing market remain stable, with the median home price of a single-family home running flat at $1 million in December, while condominium prices were up modestly in December at $503,000. Inventory levels remained tight despite a meaningful slowdown in sales. And now, let me turn the call over to Dean.

Dean Shigemura, Chief Financial Officer

Thank you, Peter. Our loan growth remained strong in the fourth quarter, with total loans rising by $324 million or 2.4% compared to the previous quarter, and by $1.4 billion or 11.3% year-over-year. In 2022, we achieved double-digit growth in both commercial and consumer loan portfolios, with year-over-year increases of 10% and 12.2%. As Mary will elaborate on, our loans are primarily secured by real estate with low loan-to-value ratios. This robust annual growth trend has allowed us to gain significant market share in our main lending market, where we are the market leader. Our deposits continue to be a major strength for us. Approximately 75% of our deposit customers have been with us for over 10 years, with nearly half for 20 years or more. 92% of our deposits come from core commercial and consumer clients, while the remaining 8% includes public deposits, mainly from government accounts. A significant 92% of our deposits are in core checking and savings accounts, with 33% in noninterest-bearing accounts and only 8% in time deposits. As anticipated, our deposit mix shifted slightly this quarter towards higher-yielding products, resulting in increased balances in our TDA and savings accounts. Nonetheless, we managed our overall deposit costs effectively, maintaining an average rate of 46 basis points during the quarter. Even with a slight decrease compared to the previous quarter, our total deposits grew by $256 million or 1.3% in 2022, while our total deposit betas were kept under control at 11.5% cycle-to-date, showing our ability to maintain liquidity at a reasonable cost. On the earnings asset side, net interest income and margin benefited from strong cash flows and asset repricing at higher rates. Specifically, the yields on maturing loans and investments in the fourth quarter were 3.8% and 2%, respectively. These cash flows were primarily reinvested into new loans yielding around 5.2% for the quarter. With nearly $3 billion in annual cash flows from loan and investment maturities, we have significant opportunities to reinvest into higher-yielding assets, particularly loans, which reflects our recent experience. Additionally, another $3.4 billion in assets are set to reprice annually, which enhances our rate sensitivity. Together, our assets exhibit a balance of short-term and long-term repricing features. Net interest income for the fourth quarter stood at $140.7 million, increasing by $14.3 million or 11.4% compared to the same quarter in 2021. Excluding non-core PPP loan interest income, the year-over-year rise in net interest income was $19.1 million or 15.7%. Compared to the pre-pandemic fourth quarter of 2019, our net interest income improved by $16.9 million or 13.6%. The consistent improvement in net interest income over the years results from ongoing strong core loan growth, rising interest rates, and managed deposit rates. On a linked quarter basis, net interest income declined by $900,000, which is less than 1%. This decline was influenced by the inverted yield curve, and we have begun to see an uptick in deposit rates and betas, along with a decrease in deposit balances industry-wide, both of which impacted our net interest income. In the quarter, we added wholesale funding at appealing rates to bolster our current funding while providing long-term fixed-rate funding to mitigate the risks associated with prolonged higher short-term rates. Looking ahead, we expect the conditions we encountered in the fourth quarter to persist. Continued loan growth and asset repricing will be beneficial, while the ongoing inverted yield curve and rising deposit costs may have a dampening effect. The projections for deposit balances and betas are uncertain. However, as previously mentioned, the structure of our deposit base allows us flexibility in managing our funding costs amid this uncertainty. During the quarter, we adhered to our disciplined expense management practices as economic conditions remain unpredictable. Noninterest expenses in the fourth quarter totaled $102.7 million, a decrease of $3 million compared to the previous quarter. It's worth noting that the third quarter expenses included $1.8 million in severance costs. Adjusting for the severance in the third quarter, expenses decreased by $1.2 million from the prior quarter due to continued efficiencies across various areas, allowing us to slow our hiring pace while still investing in the business. Notably, our innovation spending in the quarter was reduced but not halted, as we strive to position the company for future growth. Our commitment to disciplined expense management will continue into 2023. For the entire year, we project expenses to rise by around 3%, despite the expectation of ongoing high inflation. Industry-wide increases in FDIC assessments and annual merit raises each account for 1% of the 3% increase. Another 1% is allocated for sustained investment in the company, albeit at a slower pace than in previous years. Although inflation remains a concern, we expect that efficiencies gained from operations and prior investments will help offset these increases. As part of our efficiency strategy, we will be rationalizing operations and reducing staffing in several areas, leading to a severance expense of $2.9 million this quarter, in addition to the 3% core expense guidance. It's important to remember that seasonal payroll taxes and benefits related to incentive payouts will also be included in the first-quarter expenses, with this year’s estimated seasonal impact being $4 million compared to $3.7 million in the first quarter of 2022. This amount is accounted for in our full-year expense guidance for 2023. To summarize our financial performance, in the fourth quarter of 2022, net income reached $61.3 million, up by $8.5 million or 16% compared to the previous quarter. The earnings per common share for the fourth quarter was $1.50, an increase of $0.22 or 17.2%. For the full year of 2022, our net income totaled $225.8 million, and earnings per common share were $5.48. As Mary will elaborate, we recognized a provision for credit losses of $200,000 this quarter. Noninterest income for the fourth quarter was $41.2 million. As a reminder, the third quarter's income was adversely impacted by a one-time charge of $6.9 million related to the loss on the sale of leased equipment and a $900,000 charge from a change in the Visa Class B conversion ratio, recorded as a contra revenue item in investment securities gains and losses. After adjusting for these third-quarter impacts, noninterest income increased by $2.7 million linked quarter, mainly due to higher customer derivative and foreign exchange revenue. We anticipate noninterest income will average around $39 million per quarter in 2023, as ongoing market volatility and uncertainty are likely to affect asset management income, and higher mortgage rates will suppress mortgage banking income. In the first quarter, there will also be an additional contra revenue item of $600,000 regarding the Visa Class B conversion ratio adjustment, which will appear in investment securities gains and losses. Our return on assets for the fourth quarter was 1.05%, with a return on common equity of 21.28%. Our efficiency ratio stood at 56.46%, and the net interest margin was 2.60%, unchanged from the third quarter. The effective tax rate for the fourth quarter was 22.4%, with a projection of approximately 23% for 2023. Our capital levels remain robust, with CET1 and total capital ratios at 10.92% and 13.17%, respectively, well above our regulatory minimum capital requirements. Our risk-weighted assets, relative to total assets, remain significantly lower than those of our peers, reflecting our lower risk profile and giving us the capacity to expand while maintaining solid capital levels. During the fourth quarter, we returned $28 million or 46% of net income available to common shareholders in dividends, along with $2 million in preferred stock dividends. We repurchased 192,000 shares of common stock totaling $15 million. Furthermore, our Board raised the authorization under the share repurchase program by an additional $100 million, bringing the total remaining authorization to about $136 million. Lastly, our Board declared a dividend of $0.70 per common share for the first quarter of 2023. Now, I'll hand the call over to Mary.

Mary Sellers, Chief Risk Officer

Thank you, Dean. Our loan portfolio construct, with 97% in Hawaii and Guam assets, continues to reflect our strategy of lending in markets we understand and to people we know. These underpinnings, coupled with consistent conservative underwriting and active portfolio management, result in a loan portfolio that is diversified by category, has appropriately sized exposures, and is 80% secured by quality real estate with a combined weighted average loan to value of 56%. Credit performance remained very strong in the fourth quarter. Net loan charge-offs were $1.9 million or 5 basis points of average loan and leases annualized, compared with 3 basis points in the third quarter and 2 basis points in the fourth quarter of last year. For the full year, net loan and lease charge-offs were $6 million or 5 basis points, compared with $5.1 million or 4 basis points from '21. Non-performing assets totaled $12.6 million or 9 basis points at the end of the quarter, down 1 basis point for the linked period and down 6 basis points year-over-year. All non-performing assets are secured with real estate with a weighted average loan to value of 58%. Loans delinquent 30 days or more totaled $31 million or 23 basis points, up from 18 basis points in the third quarter and flat with the fourth quarter of '21. Our criticized loan exposure represented just 1.09% of total loans, down 3 basis points from the prior quarter and 111 basis points year-over-year, as we continue to see sustained improvement in the financial performance of those customers who had been most impacted by COVID. Our consistent conservative approach to underwriting is reflected in the consistently strong quality of our loan production and portfolio. In 2022, 67% of commercial production was secured with quality real estate conservatively leveraged. Commercial mortgage production had a weighted average loan to value of 59% and construction production had a weighted average loan to value of 64%. 76% of 2022 consumer production was secured with real estate, again conservatively leveraged. Residential mortgage and home equity production had weighted average loan to values and combined weighted average loan values of 65% and 59%, respectively. 71% of our home equity production was in first lien position. Similarly, FICO scores for all our consumer production remain strong. Portfolio monitoring metrics also remain very strong. Our commercial mortgage and construction portfolios have weighted average loan to values of 56% and 63%, respectively. Residential mortgage and home equity portfolios have weighted average loan to values or combined weighted average loan to values of 57% and 52%, respectively. 72% of our home equity portfolio is in a first lien position. Monitoring FICOs remained very strong. At the end of the quarter, the allowance for credit losses was $144.4 million, down $2 million for the linked quarter, and the ratio of the allowance to total loans and leases outstanding was 1.06%, down 4 basis points from the prior quarter. The decrease this quarter was driven off UHERO's December 2022 forecast, which reflected lower unemployment rates for '23 and '24 than in their prior September forecast. UHERO's outlook is based upon actual lower unemployment rates realized in '22 and continued strength in tourism, with any softening in domestic demand due to a recession to be offset by a continued recovery in our commercial visitor base, particularly Japan, coupled with strength in construction given the number of planned federal and state infrastructure projects. The reserve does continue to consider downside risks of a recession, the impacts on inflation and rising interest rates. The reserve for unfunded credit commitments was $6.8 million at the end of the quarter, up $300,000 for the linked period. I'll now turn the call back to Peter.

Peter Ho, Chairman, President and CEO

Thanks, Mary. As we enter into 2023, the forward view on the economy is somewhat cloudy. Economic conditions, while buoyant currently, may be tested in the coming days by the continued effects of tighter Fed policy. Asset values may also be challenged by higher rates. Bank of Hawaii remains well geared for potentially choppier waters. Our credit portfolio benefits from conservative underwriting standards not just of late, but over the course of many years. Our deposit base is a great source of strength, diversified, granular, and long-tenured. Our investment assets are both abundant, high quality, and highly liquid. And now, we'd be happy to respond to your questions.

Operator, Operator

Our first question comes from Kelly Motta with KBW. Your line is now open.

Kelly Motta, Analyst

Hi, good morning. Thank you so much for the question.

Peter Ho, Chairman, President and CEO

Hi, Kelly.

Kelly Motta, Analyst

I would like to just start off with, I really appreciated all the color and moving part on the expenses and your outlook for the year. But just as a point of clarification, what are you using as your starting point for expenses relative to 2022? Is it about $413 million, or is there a different number I should be using? There were some one-time charges in 2022.

Peter Ho, Chairman, President and CEO

$415 million.

Kelly Motta, Analyst

$415 million.

Peter Ho, Chairman, President and CEO

$415 million.

Kelly Motta, Analyst

That's really helpful. Next, I would like to discuss your loan growth, which has been very strong in the double digits. Looking ahead, do you have any insights on demand and whether there might be a more conservative approach that could lower that growth rate? It would be helpful to hear your thoughts on opportunities for loan growth in the future, as well as your plans for funding that growth, whether through wholesale sources, the securities book, or any other means.

Peter Ho, Chairman, President and CEO

Yes, Kelly, you are correct; we have been fortunate to achieve annualized loan growth for several quarters now. However, we do see some tightening occurring. I believe we have a reasonable outlook for loan production in the first quarter, but I don't expect 2023 to show double-digit loan growth. Achieving mid to high single-digit growth would likely reflect current market conditions. Our underwriting standards and policies remain unchanged, as we maintain consistency through economic cycles. However, it seems that borrower profiles may be deteriorating slightly due to inflation, a slowing economy, and rising interest rates affecting the capital structure. Additionally, the residential market, which is a significant source of value for us, has been significantly impacted by interest rates and the decline in refinancing activity.

Kelly Motta, Analyst

Got it. That's really helpful. It seems that regarding your outlook for margin, the primary variable pertains to deposits, including both the betas and the overall flows of deposits. Your margin remained flat this quarter. Do you believe we have reached peak margins at this stage in the cycle? How should we approach this moving forward?

Dean Shigemura, Chief Financial Officer

Yes. I think near-term, we have reached peak margin in the fourth quarter. So, modest decreases, at least in the first and second quarters.

Kelly Motta, Analyst

Got it. That's helpful. Thanks. I'll step back.

Peter Ho, Chairman, President and CEO

Thanks, Kelly.

Operator, Operator

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

Andrew Liesch, Analyst

Hey, everyone. Good morning.

Peter Ho, Chairman, President and CEO

Hi, Andrew.

Andrew Liesch, Analyst

I have a question about the fee income guidance of $39 million. Considering the wealth size and mortgage banking for this quarter, along with some unusually high fees in other categories that you mentioned, it seems that wealth and mortgage are the main areas where there might be some pressure. However, $39 million appears somewhat low to me. Are there other areas experiencing weakness or pressure on fee income?

Peter Ho, Chairman, President and CEO

Yes. So, I mean, I think, Andrew, the way to think about it is $39 million is probably a good baseline. And then, we have a number of line items that are just a little bit more unpredictable, given the rate environment. So, obviously, mortgage income is not likely to be a big contributor. That historically has been a big component of a $40-plus million fee income quarter. That's just not there right now. The asset management side, I would say, as long as market conditions hold both on the fixed income as well as equity side, we should be able to see a kind of slow and steady growth there. But if conditions change there, those numbers change pretty rapidly, as you know. And then, finally, kind of the big mover is really our swap revenue. And when rates are very low and production levels are knowable and buoyant, that's a very steady and high-performing space for us. As the markets become choppier, a little bit more difficult to figure out production-wise. And as people are a little bit more hesitant to just delve straight into a swap transaction, because they're trying to figure out where rates are going to fall out, that number can swing a couple of million dollars one way or another in a quarter. And that's really kind of what's driving our conservatism around the $39 million. We hope that represents more of a downside with some attendant upside attached to it.

Andrew Liesch, Analyst

Thank you for the useful insights. Dean, I wanted to follow up on Kelly's question about the margin peaking. You mentioned pressure in the upcoming quarters. What factors could ease that pressure? Would it involve rate cuts or possibly delays in asset repricing? I'm interested in understanding what might help alleviate that pressure.

Dean Shigemura, Chief Financial Officer

Right. So, what we have kind of built into at least our rate outlook, if you will, is kind of the Fed getting to a 5% handle on Fed funds. So, what could help us, which is really not our base case that they don't raise rates anymore and look to cut rates. But realistically, I don't know if that's really in the cards right now. But that would help relieve some of the pressure on the NIM going forward.

Peter Ho, Chairman, President and CEO

Yes, Andrew, I would like to add my thoughts. Our cycle-to-date beta is quite low by market standards. This suggests that we still have potential for growth in deposit rates, which may start to align with the market rates set by the Fed. This situation could create a more challenging environment for us in the upcoming quarters. Furthermore, I'd like to emphasize that net interest margin can be influenced in various ways in the current market. We are increasingly focusing on enhancing net interest income, which may also see some improvement in the coming quarters. Our goal is to bolster net interest income through additional deposit growth at competitive rates.

Andrew Liesch, Analyst

Got you. All right. Yes, that's helpful. I'll step back. Thanks.

Peter Ho, Chairman, President and CEO

Thanks.

Operator, Operator

Our next question comes from Jeff Rulis with D.A. Davidson. Your line is now open.

Jeff Rulis, Analyst

Thanks. Good morning.

Peter Ho, Chairman, President and CEO

Hi, Jeff.

Jeff Rulis, Analyst

Following up on that last point, Peter, I'd like to hear your thoughts on the beta. It seems like Q4 might not have been the complete acceleration or a catch-up quarter. I would have thought that the recent rate hikes would have prompted our rate-sensitive customers to act quickly. Are you expecting this trend to continue to impact the beta as we move into 2023, indicating that you don’t believe Q4 was a catch-up quarter and that we should anticipate further pressure?

Peter Ho, Chairman, President and CEO

I would agree. It's quite remarkable how rapidly rates shifted, primarily during the second half of 2022. Our strategy in response was to take a conservative approach regarding our betas and pricing. Given our position in the deposit markets, we believed this was the best path as we gained more experience with rate volume trends. I thought the deposit performance last quarter was decent, but I'd prefer to see it remain stable or increase slightly, which might mean adjusting our pricing. You might see that reflected in the net interest margin, and ideally, we hope to counteract any price erosion in net interest income with volume increases. However, it's important to note that net interest income could decline slightly in the upcoming quarters, which isn't an overly pessimistic outlook.

Jeff Rulis, Analyst

Yes. There is definitely a balance related to the deposit situation. I also wanted to shift to the visitor count. It seems like the numbers are showing a slight slowdown domestically, while Japan and international visitor numbers are improving. This might indicate we are settling into more stable long-term growth rates. I am curious about your thoughts on the direction we're heading and how these trends will unfold in 2023.

Peter Ho, Chairman, President and CEO

Overall, I would say the visitor industry is shaping up quite well for 2022. The U.S. market has performed strongly in both visitor numbers and spending. Japan is gradually coming back—year-to-date, it was down 89%, but in November, the decline improved to the 70%. This shows signs of improvement. Japan represents a significant portion of our international visitors, which accounts for about a third of our visitor business. Other markets like Canada and Australia are also performing better, potentially surpassing Japan's recovery by a considerable margin. Overall, the visitor segment is showing a generally positive trend relative to pre-pandemic levels, driven mainly by robust U.S. domestic travel. As we anticipate some decline in domestic travel due to a cooling economy, we hope to see an uptick in Japanese and other international visitors, although Japan's recovery has been slow.

Jeff Rulis, Analyst

Thank you. Just one last question. Dean, could you clarify the contra expense related to Visa? You mentioned $600,000. Is that for the year or by the quarter?

Dean Shigemura, Chief Financial Officer

It's for the first quarter.

Jeff Rulis, Analyst

And then, not to recur, or just a one-quarter event?

Dean Shigemura, Chief Financial Officer

In the third quarter, there was a one-time event, and I think in the first quarter of last year, it was also one-time, but it depends on how Visa manages that.

Peter Ho, Chairman, President and CEO

It's the mark on Visa.

Jeff Rulis, Analyst

Got it. Okay. Thank you.

Peter Ho, Chairman, President and CEO

Thanks, Jeff.

Operator, Operator

Our next question comes from Laurie Hunsicker with Compass Point. Your line is now open.

Laurie Hunsicker, Analyst

Great. Hi, thanks. Good morning.

Peter Ho, Chairman, President and CEO

Hey, Laurie.

Laurie Hunsicker, Analyst

Just wanted to circle back to maybe where Kelly and Drew and Jeff were touching on net interest income, but I just wanted potentially to drill down a little bit more on the funding here. Can you talk about how you're thinking about borrowings a massive uptick this quarter? It's still obviously very small relative to your liabilities. But, I guess, point number one, sitting at $410 million, how should we think about that going forward? Because those are higher costing. And then, number two, just on the public deposits, obviously, there was a jump there. Do you have the breakdown on what part of that is time? And then, number three, can you comment on the noninterest-bearing? So, your noninterest-bearing average balances dropped a lot. Can you help us think about that going forward? Was that just an anomaly in the quarter, or just maybe help us think a little bit about that? Thanks.

Dean Shigemura, Chief Financial Officer

Looking at our wholesale funding, it resulted from multiple factors. One reason was to supplement our existing deposits. We aimed to protect ourselves or hedge a portion of our outlook on interest rates, especially if the Fed maintains higher rates for an extended period. The longer-term fixed-rate funding provides us with some advantages, with an average rate of about 3.92%, which is lower than the current Fed funds rate. This offers us some protection. Moving forward, it will depend on how deposit levels transition. We are also monitoring the portfolio where we typically see runoff, which could help support loan growth. Regarding noninterest-bearing deposits, it was not surprising to see a drawdown. Customers are shifting towards higher-yielding deposit products now that the Fed funds rate is at 4.5%. Some of the drawdown was directed towards these higher-yielding options, while others were due to specific projects from title companies that wrapped up in the quarter, leading to some withdrawals unrelated to the interest rate environment.

Peter Ho, Chairman, President and CEO

Yes, it wasn't surprising for us to see money moving out of noninterest-bearing accounts. Last quarter, these made up 34.9% of total deposits, and this quarter, they account for 32.6%, reflecting a 3-point drop. Interest-bearing demand and savings deposits remained relatively flat, and overall trends were stable. Regarding government deposits, both demand and savings were mostly unchanged, while there was an increase in government time deposits.

Laurie Hunsicker, Analyst

Got it. Okay. So, I had your public time deposits at $180 million last quarter. Is the delta increase there in your total public deposits? Is that all time? Or do you have that number there?

Peter Ho, Chairman, President and CEO

Yes. So, total public deposits, last quarter was $1.236 billion, this quarter is $1.706 billion. And public time was $180 million in the third quarter and $587 million in the fourth quarter.

Laurie Hunsicker, Analyst

$587 million. Okay. Got it. That's helpful. Okay. And I mean, your loan to deposit ratio is so beautiful. Your loan to core deposit ratio is so beautiful. I mean, any liquidity concerns or how are you thinking about that?

Peter Ho, Chairman, President and CEO

No, we don't have liquidity concerns. I think we frankly, we're priced too tight intra-quarter, and we're kind of hopeful of picking up more deposits in the quarter. And when that didn't transpire, we had to move, obviously, to more wholesale funding sources. So, with the teams both consumer and commercial are working on for the coming quarters is to be a little bit more dynamic from a pricing standpoint to generate more volume levels.

Laurie Hunsicker, Analyst

Okay. Great. And then, Mary, just one quick question for you. And, certainly, your credit looks great, all the way around. But specifically on the auto piece, can you just help us think about that? We saw, obviously, a pretty nice jump in auto loans this quarter. Was that purchased, or what was that? And then, I guess, the charge-off there seems like that's just one area of weakness that continues to grow and, certainly, there's a concern more generally within consumer even though your consumer book is so high. Can you just help us think a little bit about that? Thanks.

Mary Sellers, Chief Risk Officer

Sure, Laurie. In terms of indirect delinquencies this quarter, we reported 1.82%, which is an increase from 1.38% in the previous quarter. However, we are still below the 2.24% we saw in 2019 and the 2.28% recorded in 2018. For charge-off rates in the indirect sector, we averaged 35 basis points this year compared to 59 basis points in 2019 and 88 basis points in 2018. In the early stage, we moved from 30 basis points to 59 basis points, indicating a slight increase, yet it remains below pre-pandemic levels. As consumers face more financial pressure, we anticipate some normalization in our portfolio. Currently, for borrowers with a credit score under 620, we are not observing a substantial decline in quality across all metrics.

Peter Ho, Chairman, President and CEO

Yes. And Laurie, just to note because I think it's important, we don't do purchase in...

Mary Sellers, Chief Risk Officer

Portfolio, yes.

Peter Ho, Chairman, President and CEO

Yes, we do not purchase portfolios. Therefore, all of our consumer activity is driven organically through our delivery channels.

Laurie Hunsicker, Analyst

Okay. Got it. Okay, thanks. I'll leave it there.

Peter Ho, Chairman, President and CEO

Thank you.

Operator, Operator

At this time, I show no further questions. I would now like to turn the conference back to Jennifer Lam for closing remarks.

Jennifer Lam, Senior Executive Vice President, Treasurer and Director of Investor Relations

I'd like to thank everyone for joining us today and for your continued interest in Bank of Hawaii. Please feel free to contact me if you have any additional questions or need further clarification on any of the topics discussed today. Thank you, everyone.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.