Good day, and thank you for standing by. Welcome to the Bank of Hawaii Corporation Third Quarter 2021 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. [Operator Instructions] I would like to hand the conference over to your speaker, Janelle Higa. Please go ahead.

Thank you, Carmen, 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 website, boh.com, under Investor Relations. And now, I'd like to turn the call over to Peter Ho.

Great. Thank you, Janelle. Good morning, everybody, or good afternoon. I'll lead off with a little commentary on what's happening here in the Hawaii marketplace, I'll then as is our custom turn the call over to Dean, who will fill you in on the financials for the quarter, generally a pretty clean, good quarter for us, and then he'll turn the call over to Mary to touch on credit items and then we'd be happy to take your questions. So, leading off, talk a little bit about the economy here in the islands that hit pretty hard late in the summer with the Delta variant and our forecast is over Bureaucracy of Hawaii really had anticipated pretty meaningful impact to employment in the state and we were actually kind of surprised to see unemployment come out just recently at 6.6%. So continued positive downward trending in unemployment here in the State. Like I said, a bit of a surprise. And then we go to the next page. I think what's happening is the 9/20 forecast, you see an elevated level of forecast unemployment for '22 and '23. We'll see what happens in the next forecast, but at this point looking like employments in a bit of a better space than what we had - what we were all thinking coming out of our most recent Delta surge. Turning to the real estate market. Like many places in the country, it's not in the world actually, real estate continues to be hot. Sales prices - median sales prices for single-family homes up 19%, up 7.4% for condominiums, that September on September, and then inventory levels continue to trend downwards. So inventory levels for single-family homes here in the islands are now or here on Oahu actually are now down 1.2 months…

Thank you, Peter. Growth on core customers remained solid in the third. Core loans net of PPP waivers increased by $276 million or 2.4% linked quarter and $542 million year-over-year or 4.8%. Waivers on PPP loans have accelerated and balances declined by $245 million in the quarter. Our strong deposit growth continue. Core customer and operating account balances grew by $613 million linked quarter. Offsetting this growth was a reduction in non-core public time deposits of $289 million. As a result, total deposits increased by $324 million or 1.6% linked quarter and $2.8 billion or 16% year-over-year. Our strong and stable deposit base remains a readily available source of liquidity for continued growth in income. Excess liquidity is being deployed in high-quality, low-risk investments that can easily be converted into funding if needed, while providing current income and mitigating margin pressures. Our balance sheet asset sensitivity positions us well for rising rates and greater net interest income. Our strong core deposits and low loan to deposit ratio of 59% will allow us to lag rate increases, while maintaining a significant funding source for continued growth. Our mix of floating and adjustable rate loans, ample monthly cash flow and cash balances represent significant flexibility and greater income potential in a rising rate environment. Net income for the third quarter was $62.1 million and earnings per common share was $1.52. Net interest income in the third quarter was $126.8 million, up 2.7% linked quarter and up 2.1% from the third quarter of 2020. Included in the third and second quarter’s net interest income were $5.9 million and $3.8 million, respectively, of accelerated loan fees from PPP loan waivers. Adjusting for PPP loan forgiveness, the third quarter's net interest income increased by $1.2 million or 1% linked quarter as a lingering impact from…

Thank you, Dean. Customer loan balances on deferral are down 95% from their peak to 0.8% of total loans. As you recall, we elected to partner with our customers through this unprecedented event to provide additional relief, primarily through principal deferrals on low margin real estate. A 100% of the loans remaining on deferral are secured with our consumer deferrals having a weighted average loan to value of 70% and our commercial deferrals having a weighted average loan to value of 37%. A 100% of the commercial loans on deferral continue to pay interest, and our return to payment performance remained strong with less than 1% of these customers delinquent 30 days or more. Credit metrics remained strong and stable in the second quarter. Net charge-offs were $1.2 million or 4 basis points flat for the linked period. Non-performing assets were $20.6 million or 17 basis points, up 1 basis point from the second quarter. Loans delinquent 30 days or more were $28.3 million or 23 basis points at the end of the quarter, down 2 basis points for the linked quarter. And criticized loan exposure totaled 2.34% of total loans, up 17 basis points for the quarter. As Dean noted, we recorded a negative provision for credit losses of $10.4 million. This included a negative provision to the allowance for credit losses of $11.3 million, which with net charge-offs of $1.2 million, reduced the allowance to $167 million, 1.39% of total loans and leases or 1.42% net of PPP balances. The decrease in the allowance reflects the most recent UHERO economic outlook and forecast where market and forecast for our market coupled with our credit risk profile. The allowance does continue to provide for the uncertainty and potential downside risk inherent with the pandemic. 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 thank you.

Thank you. [Operator Instructions] We have a question from Andrew Liesch with Piper Sandler. Your line is open.

Hi. Good morning, everyone.

Good morning, Andrew.

Just want to talk on the margin guide here to be up slightly, does that include any improvement in the earning asset mix? You continue to have pretty good deposit inflows, just kind of curious how you see the level of cash shifting around here?

Yes, I think the – well, the guidance assumes a little bit of balance sheet growth and as well as continued loan growth and a little bit more of investing of the excess liquidity. So that's how we got to the - Hawaii got to the number.

Okay, got it. It looks like you've - over the last few quarters you've been pretty, I wouldn't say aggressive, but you've been consistent with adding the securities portfolio. So is that still the plan? And I guess the statements of the yield curve are even more inclined to add to the book.

We are - but Keep in mind that the way we've handled the investment portfolio in the past is, it's really - because it's a kind of a storage of liquidity for us, we tend to adjust the balances based on deposit and loan growth. So it would kind of be the net outcome from both of those lines.

Got it. Okay, that’s very helpful. And then on the expense front with your guide of $98 million to $99 million, is that a good run rate to you going into next year, but then maybe layering on some merit increases and then the seasonal payroll taxes in the first quarter?

It will serve as a base. We do have those items that you mentioned, but we intend to continue to make strategic investments especially in our innovation kind of area like we've seen in the past.

Got it. Okay, very helpful. Thanks for taking the questions.

Thanks, Andrew.

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

Thanks. Good morning.

Hey, Jeff.

Question for, maybe for Mary, and I don't want to get too into the weeds here, but trying to get a sense of that provision recapture, my guess is the provision and reserve levels are more led by like unemployment projections corrected versus less about what you're actually seeing the 66% number that you quoted. But is that correct that it's more on the projections that leads that number?

Yes, absolutely.

Okay. And so I guess, intuitively if projections more closely align with lower actuals, we could read that continued to recapture is possible I suppose, it's oversimplified, but...

You've got it, absolutely. Yes.

Okay, Got it. All right. Thank you. And Peter, just on the loan growth side, I mean it continues to be very strong. I think in quarters past you've done a thorough job of sort of pegging by segment, where you think you have some tailwind, some that might have some headwinds. So just if you wouldn't mind kind of rattling through the book and where you see in terms of not only Q4, but '22 where you're optimistic and where some areas that might come?

Sure. So we had good growth in both commercial as well as consumer on a core basis, Jeff. C&I, actually, if you net out the PPP out of C&I, that was up 5.4% on a linked basis for the quarter, really driven by - we've made some great investments in people over the past couple of years and those individuals have helped us build market share and in a few markets - some markets here in the islands. So I think C&I has an opportunity to grow into '22, probably not at the 5% linked level, but a reasonably healthy growth rate there. CRE was up 1.7% in the quarter on a linked basis and we think there is a good amount of room in that space as well, both in our granular, what we call, our fast track product which is smaller commercial mortgages to smaller investors and mom and pop types, but also in the institutional space. I think clearly the market has recognized the durability of Hawaii assets at the institutional level and we're seeing kind of renewed interest after taking a pause through the pandemic. Construction, I think should be strong as well, that was up pretty nicely in the quarter and really led by hopefully affordable housing output because that is - we certainly need that here in this marketplace. Switching over to the consumer side, resi was about flat for the quarter on a linked basis, production was down about 30% as rates started to pick up. But the good news is that was offset by really great production in just about all of our other consumer categories, so HECO was up very smartly, indirect even was up despite the inventory challenges of that industry, and our other consumer which is basically instalment was up $36 million or just under 10% for the quarter on a linked basis, really driven by - we kind of restarted that program as we took a bit, pulled back a bit on that programing through the pandemic. And so I think that was - that created some pent-up demand in the book, but still a very good result. And I think the other interesting thing on the consumer side is we're seeing a good uptake in our digital channels. So 18% of our production for the quarter was through our digital channels, up 62% year-on-year.

Okay, appreciate it. A lot of details, sounds pretty, pretty good momentum into '22, I suppose. Maybe one last one, just, Dean, and maybe it's Dean's question. Just the PPP, could we kind of assume that's largely cleaned up by year-end, is that fair to say?

Yes. We expect the fourth quarter to pay off most of the - what's remaining. But we also do expect some might carry over, but not that material amount.

Okay. Thank you.

Yes. Take care.

Thank you. [Operator Instructions] We have a question from Laurie Hunsicker with Compass Point. Please go ahead.

Yes. Hi, thanks. Good morning. Can you just refresh us on how much in PPP fees are actually remaining?

Yes, we have approximately $7.7 million remaining.

Okay. And then I just want to make sure I heard you right, it was $5.9 million that was reflected in this quarter.

That was the accelerated fees.

Right, the forgiveness.

Right.

Okay, okay. So if I'm stripping that out, so your margin then was 2.21% relative to 2.30% ex-PPP gains last quarter. I guess, can you help us think a little bit about your comments about potential margin widening? And also maybe the FHLB borrowings that were prepaid in the quarter, when were they repaid and how much and what were those costings? Thanks.

Okay, let me take that second one first on the repos. It was towards the end of the quarter, the approximate rate was about 2.6% - 2.4%, sorry, 2.4%. And then the - in terms of the margin, I think I get to the same numbers that you did on the PPP waivers. Liquidity impacted us quarter over quarter by about 11 basis points and then our growth and deployment of assets added back about 2 basis points.

Okay, great. And then just one last question around that. Do you anticipate doing any borrowing prepays in the coming quarter? Or how are you thinking about that?

I think it will depend on the situation. I mean, we've done these opportunistically. When it look positive from various fronts, we will do it. But right now I guess nothing planned here for the quarter.

Okay, great. And then, sorry, just two more ones from me. Just want to make sure I got this right. So the preferred this quarter was $1.006 million, next quarter we'll see the full impact, that will be $1.969 million, am I doing the math on that right?

Yes, for the fourth quarter you will see approximately $2 million in preferred dividends.

$2 million, Okay, perfect. And then just last one from me. How should we think about tax rate going forwards?

For the fourth quarter estimate is about 24%.

Okay. And what about for next year, ex whatever is happening in Washington, how should we think about that?

I think for now 24% is also a good number.

Thank you. And I'm not showing any further questions.

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

Thank you. And this completes today's conference call. Thank you for participating. And you may now disconnect.