BANK OF HAWAII CORP Q3 FY2024 earnings call

• Market conditions: Unemployment in Hawaii at 2.9% (below national average), visitor arrivals impacted by lower Maui arrivals but elevated from pre-pandemic levels, Oahu residential real-estate stable with median sales prices up modestly.
• Credit quality: Focus on core markets in Hawaii and Western Pacific, leveraging local expertise; majority of loan book from long-standing relationships (60% of clients over 10 years); loan portfolio credit metrics stable with low net charge-offs, non-performing assets, and delinquencies.
• Financials: Net interest income and NIM expanded, fee income grew, operating expenses fell; net income $40.4M, EPS $0.93; capital levels improved with Tier 1 and total capital ratios increasing, accumulated other comprehensive loss decreasing.

Loans: 93% in Hawaii, 4% in Western Pacific, 3% in Mainland. Deposits grew 2.8% on a linked spot basis, holding top deposit market share in Hawaii for 2024. Cost of interest bearing and total deposits tracked well below peer medians.

• Net interest income expected to improve with Fed rate cuts, initial short-term negative impact but long-term positive as rate-sensitive assets and deposits reprice.
• Core expenses expected to increase 1%-1.5% in 2024 from 2023.
• Board declared a dividend of $0.70 per common share for the fourth quarter of 2024.
• Paid out $28 million to common shareholders in dividends and $3.4 million in preferred stock dividends in Q3, with full Series B preferred dividend in Q4 totaling $5.3 million for Series A and B.

• Interest rate changes could have a short-term negative impact on net interest income before turning positive as time deposits reprice.
• Potential credit risks from non-core lending activities, though minimal and not systemic.

Q: Were there any interest recoveries or one-timers in the margin this quarter and what was the September average margin?

A: There was a small amount of reversals (~$100,000), nothing material. September average margin was 2.17%.

Q: Could you summarize the margin outlook with rate cut impact?

A: NII and margin will gently increase quarter-over-quarter, with asset repricing offsetting some deposit mix shifts, and longer-term benefit from Fed rate cuts despite initial short-term negative impact.

Q: Any sector behind the increase in non-accruals?

A: No systemic sector; slight increase from non-core lending activities, with a small subsegment in lodging related to international visitors, but LTV and sponsors support it.

Q: Delta between end of period deposits and average and seasonality?

A: Saw unexpected large public deposits and seasonal build, expecting moderation in Q4 towards average.

Q: Exposure to lodging dependent on international visitors?

A: Fraction of $700 million lodging portfolio, international segment best performing this year with Japan visitor arrivals up, and improving yen-dollar exchange rate.

Q: Drivers of commercial real-estate loan growth?

A: Nice mix of pipelines and production build, with commercial lending activity anticipated to build.

Q: Expenses guidance and fee income?

A: Full year core expenses expected to increase 1%-1.5%, fee income somewhat elevated from historic levels with better fee performance across the board.

Q: Short-term NII impact of Fed funds and borrowings?

A: Short-term NII impact from Fed funds repricing, borrowings (FHLB debt ~2-3 years to maturity, 4.13% rate) managed for optimal funding.