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

Explicit Guidance:

• Non-Interest Income: Projected normalized level of approximately $44 million for the fourth quarter.
• Non-Interest Expense: Projected normalized level of approximately $112.5 million for the fourth quarter.
• Dividends: Board declared a $0.70 per share common stock dividend payable in the fourth quarter.
• Share Repurchases: Plan to repurchase an additional $20 million of common stock in the fourth quarter; Board approved a $200 million increase to the existing repurchase authorization. Future 2027 buyback levels will be reevaluated in Q4.
• Expense Growth Run Rate: Management targets a normalized annual expense growth rate of 2.5% to 3% going forward.
• Capital Targets: Strategic goal to maintain a Tier 1 leverage ratio of approximately 9%.
• Deposit Repricing Beta: Expected deposit beta on the "way up" is approximately 34%, though management notes it will take several quarters to achieve this level.

Business-Segment Outlook:

• Loan Growth: Anticipates overall loan growth in the low-mid single-digit range for the coming period, driven primarily by commercial lending; consumer lending remains challenged by high interest rates.
• Commercial Loans: Pipeline remains healthy; growth expected to continue, particularly in commercial real estate (CRE) with low vacancy and flat inventory in Oahu.
• Consumer/Lending: Residential mortgage growth is muted due to rates; however, management is optimistic for growth in Home Equity Lines of Credit (HELOCs) as homeowners seek to access equity rather than refinance existing first mortgages.
• Deposit Mix: Anticipates a return to modest deposit growth in the fourth quarter; expects the negative deposit mix shift to moderate and return to prior four-quarter ranges.
• CD Roll-Off: Approximately 50%+ of CDs maturing in the next three months at ~2.90%; expect renewal rates of approximately 3.0%, with new money promotions at 3%.
• Wealth Management: Continued focus on deepening relationships between commercial banking and wealth management (e.g., Center for Family Businesses) to generate additional fee income.
• Fixed-to-Floating Ratio: Portfolio currently at 57% fixed-to-float; $200 million in forward-starting swaps became active during the quarter, bringing the total swap portfolio to $1.6 billion.

Market and Competitive Outlook:

• Pricing Environment: September rate hike expected to add several basis points to earning asset yields in the fourth quarter as floating-rate assets benefit from the full period.
• Deposit Costs: Strategic runoff of ~$200 million in high-cost public funds is expected to provide a modest tailwind (approx. 1 basis point) to NIM and deposit costs going forward.
• Competitive Landscape: Interest-bearing deposit betas expected to be around 34% on rate hikes; management notes the market has been rational.
• Market Share: Bank of Hawaii holds >34% of the local deposit market, up 6.7% over the last 20 years; focus remains on expanding penetration rather than relying solely on economic growth.

Macro / Industry Outlook:

• Hawaii Economy: Projected real GDP growth of 1.6% in 2027 (after low single-digit growth in 2026); unemployment remains low at 2.8%.
• Tourism: Mixed results recently; visitor arrivals and spending above prior year levels through August despite weather impacts.
• Economic Drivers: Military construction, public investment, and military spending continue to support the local economy.
• Risk Factors: Management is monitoring inflation, energy costs, interest rates, and their impact on consumer spending, business investment, and visitor demand.
• Interest Rate Sensitivity: Underwriting incorporates stress scenarios for borrowers to assess repayment capacity under rising rate environments; average LTVs on CRE remain below 60%.

Strategic Initiatives:

• Deposit Optimization: Deliberate reduction of higher-cost public deposits continues; management anticipates running off additional high-cost deposits on a case-by-case basis, though not anticipated in the current quarter.
• Capital Allocation: Continued organic capital accretion; flexibility maintained via increased buyback authorization to capitalize on potential stock undervaluation.
• Portfolio Refinancing: One non-performing CRE loan (single commercial relationship) expected to be exited this quarter or early next quarter following borrower asset sale; loss expected to be immaterial and fully reserved.

Risks and Headwinds to Outlook:

• Consumer Lending: Ongoing impact of higher interest rates on residential lending demand and growth.
• Deposit Mix Shift: Negative deposit mix shifts occurred in the second and third quarters; further shifts could pressure NIM if not offset by asset repricing.
• Single-Name Credit Risk: While the non-performing loan is an idiosyncratic issue, reliance on a single borrower's asset sale timeline poses execution risk for exiting the exposure.
• Economic Modesty: Hawaii is viewed as a "stable but modest growth market," limiting the ceiling for organic loan growth driven purely by the economy.
• Public Funds: Remaining ~$2 billion in public funds include operating accounts unlikely to be run off, limiting the immediate upside for cost reduction in this segment.

Management Tone on the Future:

• Confidence Level: High confidence in commercial lending pipelines and credit quality (91% of loans in Hawaii, well-diversified CRE).
• Cautious Optimism: Encouraged by franchise strength and NIM expansion but mindful that long-term growth requires greater organic loan and fee income contribution.
• Discipline: Strong emphasis on "disciplined balance sheet management," "cautious expense management," and "strategic" rather than reactive deposit runoff.
• Change vs. Prior: Updated view on consumer growth (shifting focus to HELOCs) and expense growth (confirming ~3% run rate); no major changes to Q4 financial targets.

Miscellaneous:

• Tax Rate: Effective tax rate was 23.2% for the quarter due to valuation reserves on LIHTC investments; no specific future guidance provided.
• Credit Metrics: ACL ratio remains at 1.02%; criticized assets declined to 2.37%; NPA increase (to 0.30%) driven solely by the one specific loan mentioned.