Bank of Hawaii Corporation Third Quarter 2026 Earnings Conference Call - BANK OF HAWAII CORP

Financial Performance:

• Net income reached $64.3 million, and diluted EPS was $1.49, representing 1.4% and 24.2% year-over-year growth respectively.
• Net interest income (NII) rose to $156.1 million, with Net Interest Margin (NIM) expanding four basis points to 2.82%, marking 10 consecutive quarters of margin expansion.
• Return on average common equity (ROACE) was 15.4%.
• Average deposits declined 0.8% to $12.7 billion, attributed to the deployment of liquidity from real estate projects and a strategic reduction of high-cost public deposits.
• Total loans grew 0.6% quarter-over-quarter ($85 million), driven by a $73 million increase in commercial loans.
• Non-interest income was $42.7 million, negatively impacted by a $600,000 Visa B conversion charge, though excluding this, normalized income is forecast at ~$44 million for Q4.
• Non-interest expense came in at $112.3 million, with normalized Q4 expectations around $112.5 million.
• Provision for credit losses was $2.8 million, resulting in an Allowance for Credit Losses (ACL) ratio of 1.02% against outstanding loans.
• Capital ratios remained strong with a Tier 1 capital ratio of 14.4% and Total Risk-Based Capital ratio of 15.4%.
• Share repurchases included $20 million in Q3 at an average price of $78, with an additional $20 million planned for Q4; the board approved a $200 million increase to the repurchase plan.

Guidance and Future Outlook:

• Management anticipates deposit growth to resume in the fourth quarter, following the intentional runoff of public funds and temporary commercial outflows.
• Loan growth is expected to remain in the low-to-mid single-digit range, primarily driven by commercial lending.
• Net interest margin is projected to benefit from fixed asset repricing and a September rate hike, with expectations that deposit betas will rise to 34% over several quarters.
• Non-interest income is guided to approximately $44 million and non-interest expense at $112.5 million for Q4 2026.
• Long-term strategy focuses on translating franchise strengths into stronger organic growth and enhanced operating efficiency.
• Dividend of $0.70 per share was declared for Q4.

Business Segments and Product Lines:

• Commercial lending grew by 1.2%, supported by healthy pipelines and strong demand.
• Consumer lending saw marginal growth, with residential mortgages challenged by higher rates, but home equity lines of credit (HELOCs) showing promise due to equity tapping by homeowners with low-rate first mortgages.
• Wealth management fees (trust, asset management, annuity, and insurance) grew 11.5% year-over-year for the nine months ended September 30, 2026, totaling $45.2 million.
• Strategic synergy between commercial banking and wealth management is being leveraged through the Center for Family Businesses and Entrepreneurs.
• The bank holds over 34% of the Hawaii deposit market, expanding its share by 6.7% over the last 20 years.

Market and Competitive Landscape:

• The Hawaii economy is characterized by stability with modest growth, forecasting 1.6% real GDP growth for 2027.
• Tourism shows mixed recent results but remains a key economic driver, supported by low unemployment (2.8%).
• Military construction, public investment, and spending continue to provide significant economic support.
• Commercial Real Estate (CRE) vacancy rates remain at or below 10-year averages, particularly in Oahu, supporting portfolio stability.
• Management notes a rational competitive environment but acknowledges ongoing pressure from higher interest rates on consumer demand.

Risks and Challenges:

• A single non-performing commercial real estate loan increased non-performing assets to 30 basis points; however, this is considered idiosyncratic with immaterial loss exposure expected upon asset sale.
• Deposit cost stability is a challenge; average deposit cost remained at 1.27% despite a competitive landscape, with expectations of a slight quarterly increase in CD rollover rates (~3% vs 2.9% maturing).
• Consumer lending demand remains suppressed due to the elevated interest rate environment.
• Inflation, energy costs, and interest rates remain key variables to monitor regarding consumer spending and business investment.

Management Commentary and Tone:

• Tone was confident and disciplined, emphasizing "sustained momentum" and "financial and risk management discipline."
• Management expressed optimism regarding the strength of the franchise and the ability to capture market share without relying solely on macroeconomic growth.
• CEO Jim Polk highlighted the opportunity to deepen relationships and expand organic growth across retail, commercial, and wealth management segments.
• CFO Brad Attenberg provided detailed clarity on deposit runoffs, swap hedges, and margin trends.

Analyst Questions and Answers:

• Margin & Rate Sensitivity: Analysts inquired about the September margin contribution and deposit beta; management confirmed NIM of 2.83% excluding the non-accrual loan and expects a 34% deposit beta on rate hikes.
• Deposit Strategy: Questions regarding public funds runoff were addressed; management noted an opportunity to run off more high-cost public deposits but does not expect it to occur in Q4.
• Credit Quality: Clarification was provided on the single non-performing loan, confirming it was already adequately reserved for and expected to result in an immaterial loss.
• Capital & Buybacks: Management confirmed the $20 million quarterly buyback plan but noted flexibility to accelerate in 2027 based on valuation and earnings performance, with a goal of reaching 9% Tier 1 leverage over time.
• Expense Management: Confirmed that expense growth is tracking near the normalized 3% range, consistent with the year's budget.

Other Key Points:

• Credit quality remains a fundamental strength with criticized assets declining to 2.37% and net charge-offs at 9 basis points.
• The bank maintains a conservative loan structure with 91% of loans concentrated in Hawaii.
• Approximately 60% of commercial and consumer clients have been with the bank for over 10 years, indicating deep customer loyalty.
• The fixed-to-float ratio on earning assets is 57%, with $1.6 billion in active pay-fixed/receive-float swaps hedging loans and securities.
• The bank utilized short-term borrowings (averaging $120 million overnight) to manage liquidity during the deposit runoff, with plans to reduce reliance on this as deposits grow.