Good day, everyone, and thank you for standing by. Welcome to the Bank of Hawaii Corporation Second Quarter of 2021 Earnings Conference Call [Operator Instructions]. Please be advised that this conference is being recorded [Operator Instructions]. I would now like to hand the conference over to your speaker today, the Head of Investor Relations, Ms. Janelle Higa. Please go ahead.

Thank you, and 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 that 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 Web site, boh.com, under Investor Relations. And now I'd like to turn the call over to Peter Ho.

Great. Thank you, Janelle. Good morning or good afternoon, everyone. Thanks for joining in. As is our custom, we'll go through market conditions here in the islands, I'll then turn it over to Dean, who will walk you through our financials, and then Mary will touch on credit, and then we'd be happy to take your questions for the quarter. If you look at the unemployment slide here, you see that the economy here in the islands is steadily improving, really being driven by a nice improvement or regaining traction in the visitor industry as well as improvement in what we call the local economy. UHERO's economic pulse indicator, which is a high frequency aggregation of numerous data points, has basically the local economy now at 72% versus pre-pandemic levels. A quarter ago, I think we reported 62% to you, so it's nice improvement there. And you see all of this relating into better unemployment rate. So unemployment now is down to 7.7%, the fifth consecutive month of declines. The real estate market here in the islands like many markets is very strong. Oahu's single family homes were up in terms of sales, 49% June versus June a year ago. Median sales prices were up 27% and inventories are very constrained. So median days on market are down 60% from a year ago to eight days and months of inventory is down 52% from a year ago to 1.2 months of inventory. The condominium sector here on Oahu, similar story, a little bit more muted, though, but sales up 134% June on June. Median sales price is up 9% and inventory conditions very similar to the single family home market. So a very strong real estate sector here on Oahu and generally throughout the Hawaiian Islands. The visitor industry, as…

Thank you, Peter. Growth from core customers remained solid in the second quarter. Core loans net of PPP waivers increased by $113 million or 1% in the quarter and by $250 million year-over-year. Waivers on PPP loans have accelerated and resulted in a net decline of $212 million in the quarter. Our strong deposit growth continued, increasing $613 million or 3.1% linked quarter and $2.7 billion or 16% year-over-year. With a loan-to-deposit ratio of 60%, our strong deposit base remains a stable source of liquidity. Together with our healthy cash balance of $910 million at the end of the quarter, we maintained significant flexibility for further loan and investment growth. And we continue to deploy liquidity to support net interest income, as well as mitigate the impact of near term rate pressures. Consistent with this strategy, we added $1 billion of liquid and safe investments to the portfolio, increasing total balances to $8.5 billion. Net income for the second quarter was $67.5 million or $1.68 per common share, up from $59.9 million in the first quarter and $38.9 million in the second quarter of 2020. Net interest income in the second quarter was $123.5 million, up from $120.6 million in the first quarter and down from $126.7 million in the second quarter of 2020. Included in the second and first quarter's net interest income were $3. 8 million and $0.9 million respectively of accelerated loan fees from PPP loan waivers. Included in the second quarter of 2020 net interest income was an interest recovery of $2.9 million. Adjusting for PPP loan forgiveness, net interest income was slightly higher than the first quarter as the impact from lower interest rates was offset by the deployment of liquidity. As Mary will discuss later, we recorded a negative provision for credit losses of…

Thank you, Dean. At the end of the quarter, customer loan balances on deferral were down 88% from their peak to 1.8% of total loans. You'll recall, given we had the capacity to do so, we elected to partner with our customers through this unprecedented event and provided extended relief primarily through principal deferrals on low margin real estate. Accordingly, 93% of loans remaining under deferral are secured with our consumer residential deferrals having a weighted average loan to value of 68% and our commercial deferrals having a weighted average loan to value of 46% with 97% continuing to pay interest. Return to payment performance for previously deferred loans has continued to be strong with less than 1% of these customers delinquent 30 days or more at the end of the quarter. Credit metrics remained strong and stable in the quarter. Net charge offs were $1.2 million as compared with net charge offs of $2.9 million in the first quarter and net charge offs of $5.1 million in the second quarter of 2020. Nonperforming assets totaled $19 million, up $1.1 million for the linked period and down $3.7 million year-over-year. Loans delinquent 30 days or more were 29.8 million or 25 basis points of total loans, at quarter end down 10.1 million for the linked period and up 6.3 million from the second quarter of last year. Criticized exposure continue to [decrease] during the quarter, dropping from 2.6% of loan to 2.17% of total loans. As Dean noted, we recorded a negative provision for credit losses of $16.1 million. This included a negative provision to the allowance for credit losses of $16.8 million, which would net charge-offs of $1.2 million reduce the allowance to $180.4 million, representing 1.5% of total loans and leases or 1.56% net of PPP balances. The decrease in the allowance is reflective of the most recent UHERO economic outlook and forecast for our market coupled with our credit risk profile. The allowance does continue to consider and provide for the potential downside risk inherent with the pandemic. The reserve for unfunded credit commitments was $4.5 million at the end of the quarter with a provision of $1.5 million made to fund the linked period increase. I'll now turn the call back to Janelle.

Thank you, Mary. This concludes our prepared remarks. We are now happy to answer any questions you may have.

[Operator Instructions] And our first question is coming in from Ebrahim Poonawala from Bank of America.

I guess maybe the first question just around capital. Dean, you mentioned plans to resume share buyback. Give us a sense of one, as you think about going through the authorization, is there a certain level in terms of overall capital payout that you're targeting? And what's the binding constraint when you think about the Tier 1 leverage ratio? Where you're trying to maintain those ratios as you think about capital return, and also just the possibility of a dividend hike in the back half of the year?

So the kind of the measurements that we look at is the Tier 1 leverage ratio. We've stated in the past that we'd like to stay above 7%. So we'll probably keep a little bit of a room above that but that would be one measurement that would be kind of in consideration for how much we do in buybacks. In terms of the dividends, we have stated in the past that we like to be roughly 50% of our net income in dividends over the long term. So that's kind of a target that we would head towards.

I would add to that, Ebrahim, I think that probably the straight to further or the opportunity maybe is better term to increasing the dividend, really I think is down the path of NII. So to the extent that we get some relief on the rate -- and the rate environment, I think there's upside. It feels to me like our fee income levels are pretty, at least at this point, pretty well understood for the balance of the year and expenses feel to be pretty well understood as well. So I think that that is really the rate environment that is represents the upside on the dividend, I think.

And I guess just on the rate environment and the NII. So Dean, thanks again, for the guidance, relatively clear. Two things, one, as we think about, just reminder us what's the PPP fee is remaining at the end of the second quarter and your expectations around whether or not most of it gets accreted this year?

So we have $14.5 million remaining in fees. And so this will be both the 2020 and 2021 vintages. We’re looking at pretty elevated levels, so something similar to what we had in the second quarter in terms of what would pay off. And then there's some that we think might bleed into 2022. But generally most of it will -- the remaining balances will come off in the next two quarters.

And did you say the second quarter of PPP fees were 3.8, the accelerated component?

Yes, 3.8 the accelerated component.

So it should be something in there, got it. And just I guess last question, Peter, around -- so you shared some statistics around the macro outlook. From what we understand it seems like international travel is one area that’s still missing? Is there anything else that you think about in terms of where you need to see a full set of back to normal reopening before we start seeing that unemployment from 6% going back to pre-pandemic levels?

So I think international is yet to bounce back. So what's interesting is we're nearly back to full strength in terms of visitor traffic and that's without the international market, which historically is call it a third of our marketplace. The benefit to that travelers they are a bit higher spending, so I think that's upside out there somewhere as the international traveler returns. And then the other piece the visitor segment is the group business and incentive. And beginning to hear those types of excursions beginning to percolate up again. But as you can appreciate, there is a bit of a lag before we'll start to see that traffic back in. So I think international and group and incentive is effectively the next legs up for the visitor industry and I think probably a little bit of a higher margin product than what we're getting right now.

And our next question is from Jeff Rulis of D.A. Davidson.

Peter, just to follow-on to that and not to be overly, I guess, conservative. But just trying to get a sense for the local sentiment, if there is any likelihood of restrictions coming back on with variant. And I know that around of July 4th holiday, it lifted the restrictions on vaccinated folks. But any underway or thoughts locally that needs to be taken back up?

Well, obviously, we, in this marketplace, like just about every place else in the country, are concerned and what we're seeing from the variants and the case counts. I've not heard any discussion around reapplying some of our earlier remedies. So no, nothing that I'm aware of. But obviously, if things continue to trend as they have, they -- we’ll need to begin to think through those sorts of protocols, visitor and just kind of general public. I would say though that the early indicators are, Jeff, though that the majority of the case counts right now are community spread and some from travelers but generally, returning Hawaii residents back from mainland locations. And the incident of visitor to resident transmission has been very low and continues to be pretty low.

Maybe just a housekeeping kind of maintenance stiff. Dean, I appreciate the guidance on expenses. Just noted the occupancy and data levels were pretty low linked quarter. I guess baked into that guidance, is that sustainable on those line items and I guess if there's anything to discuss on those, why they were at that level also helpful? Thanks.

So the property sale came through in that line, so the $2.1 million. So you have to adjust for that. And then in the second quarter we did have a little bit better R&M expense level. So that's a little bit uncertain but those were kind of the two reasons why the occupancy level was much lower in the second quarter, but mainly driven by the property sale.

And for the next question, Mr. Andrew Liesch from Piper Sandler.

The question is on the securities purchases, you added a billion dollars. I was just curious what you purchased? And then with rates having come in, I mean what's the appetite for more purchases to continue?

So we've been purchasing kind of what we've been in the past, which were mortgage backed securities, we did purchase some corporates, those are kind of the two major categories, but more biased towards the mortgage backs. And the average rate that we got in the second quarter was about 1.5%. And then with the drop in the long term rates, obviously, the current rates are lower. So we're trying to be a little bit more measured in terms of how we are investing the money this quarter but we're still deploying a lot of the liquidity that we do have on the balance sheet.

So I guess you had the $910 million in cash. Is there a level that you want to manage that down towards? And obviously loan growth will help with some of that and probably some deposit outflows. But what level would you hope to get this down to?

Well, it'll be probably about $250 million to maybe $300 million. And the reason for that is that we do have a lot of cash flow coming off the portfolio. So from a liquidity standpoint, we're still going to have lots of cash flow that we can reinvest into loans -- for loan growth. So we can maintain a little bit lower cash level than the $900 million.

And then speaking about loan growth, I mean good commercial growth, good consumer growth here this quarter. How our pipeline is sitting as we enter the third quarter?

Pipelines are looking pretty good, so both consumer and commercial. Commercial real estate have a good quarter, they anticipate having a good back half of this year. Residential was strong. So residential, through the first half of the year, did a billion dollars in production to lead all local providers. So feel good about that. And as rates have come down a bit here recently, a bit more pipeline in that category, so that feels pretty good as well. Home equity has reemerged, I should say, indirect was about flat, which I think given the state of auto sales right now is a pretty good performance. So those are going to be the drivers. Construction actually might have some upside as well as we get underway on a number of affordable types of transactions. And then really what we're waiting for is the other consumer category and the installments -- and I guess the C&I categories. And both of those categories, you would appreciate, have been impacted negatively by just the liquidity build in both the commercial as well as the consumer clientele. And so I think put all that together kind of a mid single digit growth rate for the next 12 months I think is reasonably achievable.

[Operator Instructions] Our next question is from Jackie Bohlen of [KWB].

Peter, I wanted to chat about the economy just a little bit. You gave some really great anecdotes there, which I love because it helps me get a sense for it, since you obviously have your feet on the ground. I just want to get a sense for how you view the rebound in tourism versus how you view the rebound in the economy overall? Obviously, I know they're interdependent but there's more to the economic rebound than just tourism. So I want to get your thoughts there.

So I would say that, obviously, the visitor industry is a big component of the local economy. But I think what we found through the pandemic is it's as big as it is, there are other factors that drive our local economy as well. And so construction driven by the health of the real estate sectors is in a good space, that's been helpful. The defense sector has been extremely strong and likely to get stronger given the geopolitical tensions in the Pacific here. And so those drivers, I think, have really been major contributors to the local economy, getting back on its feet. And I think that in order for our economy to be at full strength, obviously, we need a healthy visitor segment. But there are other factors as well and those factors seem to be doing well. The visitor front has been the velocity with which we've come back has really been surprising, at least to me, it has been surprising. And given variant notwithstanding, I think the opportunity for out of the next stage with the return of international travelers and the next stage with return of group and incentive travelers bodes well for that important segment.

And when you say group and incentive travelers, do you mean conferences and things like that, or is it a different type of travel you're talking about?

It's conferences. It's also large corporations rewarding star sales performers and things like that. It's a big segment of the industry.

And then when you think about the economy and the unemployment rate where it's at. And I realize this is a very hard discussion -- a very hard question to quantify, but I'm just looking for your viewpoint on this. When you think about all of that, as you think about people who maybe haven't entered the workforce but could, because their benefits are perhaps better than they would be if they were working. Do you think that's holding the economy back at all, or are we getting to a point where we may see an increase in people looking for jobs?

Well, that's a $64,000 question, Jackie. I don't know. I mean, it is a fact that lots of small businesses and large businesses, in the visitor industry and elsewhere, are just having a tough time getting people to come back. And so you're right. Perversely, lack of demand, poor work is in a very perverse way, holding back the post-pandemic recovery. And whether the elimination or the reduction of federal and state subsidies will help that situation, I don't know. I mean you would think intuitively that it should. But I've also looked at a few reports that indicated and I think half the states in the country have headed in that direction, they've not seen an overnight bounce back in worker supply. So it's the right question and I just don't have as much clarity as I'd like to share with you.

And I mean completely understandable. Hawaii is so unique because you're an island and so you can't have people -- well, you can't have people crossing state lines, but it's just not as easy. So thank you for all that. I really appreciate it. And then I'll get technical on the quarter for just one last one and then I'll step back. I wondered what -- Dean, thank you for the accelerated amortization. I just wanted to confirm what just the regular amortization piece of that was on the fees?

Yes, it was $2. 1 million.

So the $2.1 million plus the $3.8 million?

Correct.

And our last question is from Laurie Hunsicker of Compass Point.

Just hoping that we could just go back to occupancy. Wondering how we should be thinking about that just from the standpoint of run rate expense. And maybe can you update us, I think, beginning of the year, you were going to take branches down to 50 by the end of the year and we're sitting at 54%. Just help us think about where you are with that in terms of how we should be thinking about occupancy expense?

Well, I think we should think holistically in terms of lower occupancy expense over time. And so we had been operating -- our branch count has jumped around through the pandemic just based on where the demand for in-person banking is happening. And so we're down to 50%, I want to say, but 54% technically. And the question for us right now is trying to toggle between those two numbers as to where we think we're going to end up from a permanent go forward posture. But I mean, I think we've had great success in the transition from in person to digital that obviously has created opportunities for us to call the square footage in our branch system. So if you look over the past decade, if you take kind of a slightly higher view on it, our square footage is down 29% from 2010 and our branch count is down 34%, which has had a pretty significant reduction in overall branch, not just occupancy but also overall branch expenses. Where we go from here, Laurie, is I think we're probably comfortable for the here and now in that 50%, 54% range, we'll probably decide in the next 12 months or so what that exact number is going to be, but feel pretty good about the general structure of the branch system right now.

And so then when we think about occupancy expense that $8 million or so run rate would be a good number -- quarterly number…?

Yes.

And then the FHLB prepay of $3.2 million, how much was actually prepaid and what was the cost and about when in the quarter, if you have it?

The total amount was $100 million. And I want to say it's kind of almost mid quarter.

And costing?

You mean in terms of rate, it was about 1.3%.

And then do you plan to do any more or was that kind of it?

I think it's going to be opportunistic. This one was opportunistic because of the benefits that we got out of it. So as we see opportunities in the future, we may elect to reduce further.

This was a nice opportunity, Laurie, because the gain on securities basically offset the cost of accelerating the prepay and then we got the improvement on the margin. So it's kind of a no brainer for us. And if that shows up at our door again, we'll do it again.

And then just looking at the other other expense line. So $17 million this quarter compared to $13 million last quarter. Obviously, the $17 million contained the FHLB prepay. I backed that out it was $14 million, then I back out the contactless card rollout it was $11 million. So $11 million last quarter going to $14 million. Was there anything else nonrecurring that showed up in that number, or any thoughts around why that number was higher? Will it be that run rate going forward? How should we think about that?

Well, the contactless card rollout actually showed up in the data processing line. So the adjustment to other -- only for the second quarter.

So it's $13.3 million going to, call it, $14 million. And then just last one for me. The premium and in the quarter, how much was that?

$10.1 million.

And that's it for the question-and-answer session. We don't have -- no more questions on the queue. Presenters, I'm turning back the call to you.

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 any further clarification on any of the topics discussed today. Thank you so much, everyone.

And that concludes our conference for today. Thank you for participation. Please, you may hang up now. Thank you so much.