Good day, and thank you for standing by. Welcome to the Bank of Hawaii Corporation Second Quarter 2022 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] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Jennifer Lam, Executive Vice President, Treasurer and Director of Investor Relations. You may begin.

Thank you. 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 the actual results may differ materially from those projected. During the call, we'll be referencing a slide presentation as well as our 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.

Thanks, Jennifer, and good morning, everyone Bank of Hawaii produced solid performance during the second quarter of 2022. Core loans grew at a higher linked rate than the prior quarter for the fifth consecutive quarter. Deposit growth was on target. Our deposit base, which is 92% core consumer and commercial by customer type and 94% core demand and savings by product type, is well positioned for rising rates. We are clearly seeing the benefits of our strategic investments in both our consumer and commercial businesses through increased production. Margins expanded, efficiency increased and credit statistics improved in the quarter. I'll spend the next few minutes sharing with you conditions in Hawaii are predominant market, and then turn the call over to Dean to cover the financials. Mary will then cover credit and risk. Wide economy continues to improve if tourism and overall business activity improve. Here you see unemployment at 4.3% a range just north of national levels. This compares favorably to the 7.7% differential that existed early in the pandemic between Hawaii and the U.S. Mainland from an unemployment standpoint. On the real estate front, sales activity cooled in June versus prior year levels on Oahu, although sales prices actually increased from prior year levels for both single-family homes up 12% and condominiums up 16%. Once supply of sale housing inventory remains at suppressed levels with 1.5 months of inventory for single-family homes and 1.6 months for condominiums. Of note, current inventories are down 53% for state single-family homes and 46% for condominiums as compared to pre-pandemic June 2019 inventory levels on Oahu. The visitor industry continues to improve with the month of May at 91.6% of 2019 levels by arrival and 110.6% of 2019 levels by visitor spend. Year-to-date numbers are at 85% and 102.3% of 2019 arrivals and spend levels. This performance comes despite less than half of the international market. Traditionally, 35% of our visitor market having yet to return as of yet. Obviously, strong support from U.S. visitors is making up meaningfully for the shortfall. RevPAR levels across the state are actually ahead of 2019 levels as demand for travel and specifically travel to Hawaii remains high. And now let me turn the call over to the Dean to share the financial highlights. Dean?

Thank you, Peter. Our strong core loan growth continued in the second quarter. Core loans net of PPP paydowns increased by $434 million or 3.5% linked quarter and by $1.4 billion or 12.1% year-over-year. Growth was balanced across both commercial and consumer loan portfolios at 3.3% and 3.6% linked quarter respectively and 11.7% and 12.4% year-over-year. Core loan growth has accelerated over the last several quarters with double-digit annualized growth rates well above recent annual averages. As Mary will discuss later, growth was achieved while maintaining our conservative underwriting and disciplined portfolio management practices with our commercial and consumer loan portfolios remaining predominantly real estate secured. Deposits increased by $310 million or 1.5% linked quarter providing a solid source of low cost funding in a rising rate environment. We maintained our deposit pricing discipline during this quarter with average deposit costs of 7 basis points, an increase of just 2 basis points. We also maintained our attractive and stable core deposit base with 94% of total deposits in checking and savings accounts. 92% of deposits are from core commercial and consumer customers and the remaining 8% in public deposits are predominantly government operating accounts. The quality of our deposit base is further demonstrated by the longevity of our deposit relationships with our customers. Nearly three quarters of our deposit customers have been with us for over 10 years and nearly half for more than 20 years. Non-interest income in the second quarter was $132.9 million. Interest income included $500,000 from PPP loans and we recognized $1.1 million in interest recoveries. Adjusting for these, our core net interest income was $131.3 million, up $7.9 million or 6.4% from the first quarter. Compared to the year earlier second quarter, core NII increased by $15.3 million or 13.2%. Our core net interest margin…

Thank you, Dean. Our loan portfolio construct reflects our strategy of lending in markets we understand, people we know and communities we trust. These underpinnings coupled with consistent, conservative underwriting and discipline portfolio management result in a loan portfolio that is diversified by category as appropriately sized exposures and is 80% secured by quality real estate with a combined weighted average loan-to-value of 56%. Credit performance continued to improve and remained very strong in the second quarter. Net loan and lease charge-offs were $600,000 or 2 basis points of average loans and leases annualized compared with 5 basis points in the first quarter and 4 basis points in the second quarter of last year. Non-performing assets totaled $15.5 million or 12 basis points at the end of the quarter, down 4 basis points for both the linked period and year-over-year. All non-performing assets are secured with real estate with a weighted average loan-to-value of 58%. Loans delinquent 30 days or more remained stable at $27.5 million or 21 basis points, while down $2.2 million or 4 basis points year-over-year. And criticized loan exposure represented just 1.3% of total loans down 30 basis points from the prior quarter, driven by continued sustained improvement in the financial performance of those customers who had been most impacted by COVID. The quality of our loan production in the second quarter remained strong. 76% of commercial production was secured with quality real estate modestly leveraged. Our commercial mortgage production had a weighted average loan-to-value of 63% and construction production had a weighted average loan-to-value of 61%. 78% of the quarter’s consumer production was secured with real estate, again, conservatively leveraged. Residential mortgage and home equity production had weighted average loan-to-value and combined weighted average loan-to-values of 65% and 58% respectively. 76% of our home equity production was in a first lien position. FICO scores for all our consumer production remained very strong and consistent. Portfolio monitoring metrics also remain very strong. Our commercial mortgage and construction portfolios have weighted average loan-to-value of 57% and 63% respectively. Residential mortgage and home equity portfolios have weighted average loan-to-values or combined LTVs of 57% and 52% respectively. 72% of the home equity portfolio is in a first lien position. And again, monitoring FICOs remain very strong. As Dean noted, we recorded a negative provision for credit losses of $2.5 million this quarter. This included a negative provision for the allowance for credit losses of $2.9 million, which with net charge-offs reduce the allowance by $3.5 million to $148.5 million or 1.15% of total loans and leases. The decrease in the allowance reflects the improving economic outlook and forecast for our market coupled with our credit risk profile, while continuing to consider the broader economic uncertainty and downside risk of a recession. The reserve for unfunded commitments was $5.6 million at the end of the quarter, up $400,000 for the linked-period. I'll now turn the call back to Peter.

Thanks, Mary. As you can see, it was another solid quarter for Bank of Hawaii. We remain well positioned for whatever market and economic conditions present in the near future. We remain as always committed to the principles of consistency, conservatism and capital efficiency as highlighted in the chart on your screen. And now we'd be happy to take your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Andrew Liesch with Piper Sandler. Your line is open.

Thanks. Hi, everyone. Thanks for taking the questions.

Hey, Andrew.

Peter, just want to start on the loan side here. You referenced the challenge housing supply just kind of curious, what's driving that growth along with the home equity growth. And then where does the pipeline stand on the commercial side as well? You continue to put up really good loan growth. So I'm just curious where pipeline stand and what is driving this growth that you guys are able to put up?

Yes. So I think it’s through a bit of a comment on my opening remarks around really some of our strategic efforts. Really I think showing up nicely in this quarter, Andrew. So maybe beginning with the commercial side. What we saw commercial-wise was all of our growth for the most part came out of our middle market and small business units. And I think as you know, that's really traditionally Bank of Hawaii considered more of a large corporate lender and really in the past five years, I'd say we really begin to emphasize building up that kind of that mid-market small business segment. And in this quarter, basically, large corporate was flat in loan production, but our small business unit, middle market unit generated about 7% loan growth, which kind of got us that 3% number. So that obviously was very satisfying to us as we've been building this area. We've staffed up middle market about 45% with lenders and support staff over the past couple of years and have been fortunate to pick up a number of real well known lenders in their particular marketplaces, which has had a big impact as well. So really the strategic growth is as a result of now really having really two businesses, a large corporate business that is going to grow and has grown nicely, but to kind of have it off quarter this quarter, but our middle market business really taking shape and having a great quarter this quarter and hopefully they'll both have good quarters next quarter, but I think the point is if one falter is a little bit, the other one generally tends to pick up and that's what we're starting to see in the consistency of our commercial numbers over the past several, several quarters.…

Got it. That's really helpful. Thanks for that detail. And then Dean, just on the margin outlook, you mentioned 6 to 7 basis points in the third quarter. What are some of the assumptions behind that? Does that assume a rate hike next week? Or I mean later on this week and why wouldn't that expansion be stronger given that we just had a 75 basis point rate hike just last month?

Yes. So we're assuming 75 for this week and then maybe another 50 after that sometime in the third – this quarter. So it is based on kind of a flattish to maybe even a little bit around 3% on the tenure and then continued loan growth, so that's how we got to that number.

Got it. Are you saying rising funding costs that might slow that smaller pace of expansion?

A little of that, but mainly it's going to be kind of a flattish on the long end, but we're continuing to realize some benefits on that, but the benefits from that will just continue throughout the next several quarters and years. The short end is a little bit more instantaneous. So that's how we got to the 6 to 7.

Got it. All right. Well, thank you for taking the questions. I will step back.

Okay. Thank you, Andrew.

Thank you. Please standby for our next question. Our next question comes from the line of Kelly Motta with Bank of America. Your line is open.

Hi. This is Kelly Motta with KBW.

Yes. I knew who you were, Kelly.

Okay. Thanks for the question. Great quarter. Just wondering, this maybe a question for Mary. Peter, you mentioned in the prepared remarks, credit metrics across the board are good. The take down in criticize and delinquencies, just wondering if there's anything that you maybe watching a bit more closely that isn't showing up necessarily in reported credit metrics yet?

Actually, no, we're not really seeing any early signs of any deterioration. Of course, we have our eye on our consumer book given the impact of rising rates and inflation, but everything still looks good there in our commercial portfolio. Our client base is very strong financially. And as you know, from the metrics, have a lot of kind of financial capacity in depth to weather this, but we're continually really streaming through that to see if there's any segment we should be more concerned about.

Got it. Thanks for the color. And then turning to funding costs – back to funding costs, with the increase you saw this quarter, it looks like there was also a mention public deposits. Can you just remind me what the seasonality with those are as well as, if we were to kind of parse them out, I assume those are a bit higher cost or reprice a bit faster. How your core deposit base performed in terms of changing costs this quarter?

Yes. So just to kind of start at the top of seasonality in public deposits, we do have a bump in February and August. That's mainly due to property tax receipts. So those come to us mostly. And then in terms of costs, we did increase some of the balances on our public side. What we saw is that the – with the rising rates, market rates, we were able to pick up some public deposits at a lower cost than our funding costs. So we thought that was an attractive move for that. And overall, what we're seeing is, is still a pretty muted deposit rate environment locally. The kind of the – no one has increase of public or published rates, I should say, locally. There are some movements at the very top end of the market, but that's to be expected and that's well within our plan.

Yes. Kelly, we see that, I mean with mega rate increase one in the books, pretty good discipline in the marketplace. And as Dean indicated, you're always going to have some extraordinary large depositors who quite rightfully are going to ask for more yield and that's to be expected, I think. But in general, the broader deposit marketplace is feeling pretty good. Now we've got likely another 75 basis point increase coming through shortly. And our hope is that kind of likely yields will have to lift a bit, but still hopefully in a disciplined manner.

Got it. I appreciate all the color here. I will step back.

Thank you, Kelly.

Thank you. Our next question comes from the line of Laurie Hunsicker with Compass Point. Your line is open.

Yes. Hi. Thanks. Good morning.

Hey, Laurie.

Just seeing where Kelly was on public deposits, the [$1.647 billion], how much of that was time? And then if you have a comparable number in terms of last quarter, the [$1.244 billion], how much that was time?

In public time, Laurie.

Yes.

Yes. So it's kind of lumpy, as Dean alluded to, but this quarter public time was 420. Last quarter public time was 25 and the quarter last year, so [630, 21 a public time was 348].

Okay. Got it. And then do you have a blended cost on all of your public deposits that you could share with us?

We do, but I don't know if we have it on us right now.

Okay. No worries. Tax rate, how should we be thinking about that? That's jumped around a little bit. How should we be thinking about that for next year?

I think 23% is still a good number. It did tick up a little bit this quarter – second quarter due to some discrete items. But right now, we're looking at for the full-year 2023, this year and then probably into next year.

Okay. Great. And then just more macro, this is really for all three of you. If you could give us a refresh on where we are? The signals are starting to flash just where we are on two categories, office and leverage lending and any details you could provide us just refreshing us on those books. How much is Hawaii versus Mainland, anything that you can share as far as office LTVs?

Yes. I'll just say office and leverage are very small portfolios for us and Mary do you have details on that?

Sure. In terms of leveraged, as we disclosed it's 2.4% of total C&I at the end of the second quarter. It includes seven borrowers with average exposure of about $4.6 million. We don't have any criticized exposure in that portfolio. Mainland represents about 7% of total leverage or 7 basis points of C&I. The Mainland exposure is a global vacation ownership and timeshare company with a significant presence here, we enjoy an eight figure deposit relationship and there leverage is roughly around 4x at this point. Hawaii is the balance?

I'm sorry. You said 27% was Mainland.

Yes.

The timeshare really 20. Okay, thanks. Just clarifying. Okay, go ahead.

Okay. Hawaii is the balance of that or about 1.35% of total C&I, the largest exposure there accounts for 54% of that, or 1.3% of total C&I. It is a company that operates a sundry and convenience store here and is owned by a long established family with significant financial capacity in depth, also, enjoy a large relationship and their current leverage is about 1.6x.

And then do you – that's super helpful. Do you have the office detail?

Sure. It is the smallest segment in our commercial mortgage portfolio that represents 11% of the total commercial mortgage book. The weighted average LTV on the portfolio is 57%, average loan is $1.8 million. In terms of geographic dispersion, 15% is Mainland and that's extended to a couple of key relationship customers who have diversified – commercial mortgage book. The weighted average LTV on the portfolio is 57%, average loan is $1.8 million. In terms of geographic dispersion, 15% is Mainland and that's extended to a couple of key relationship customers who have diversified portfolios. Their collateral pools generally tend to be in supply constraints submarkets and have an LTV of 45%. The 85% balance on – in Hawaii is predominantly in Hawaii with – is in Hawaii with 5% in Guam, 59% is on Oahu, 22% of that is Class A office downtown space with a 66% weighted average LTV. There have been changing dynamics in the Class A space, a number of properties have been converted into other use. So vacancy is really at its lowest rate in the last 10 years. And in terms of other kind of segmentation there, we've got about 20% that is in medical government type tenant.

20% – I'm so sorry. So just to clear, 20% overall in medical government.

Yes.

Okay. That's great. And then when you…

Oh, I'm sorry, go ahead.

I was just going to say, when you said some of it is getting repurposed, converted into other use, do you mean some of the office spaces getting converted into condos? Is that what you meant? Or what did you mean by that?

That's been happening in the downtown area, which has created more limited supply and helped to stabilize vacancy and rents.

Got it. Perfect. Okay, great. Thanks for that color. I appreciate it.

Sure.

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

Thank you. Good morning.

Hey, Jeff.

Dean, just to follow-up on the margin. I guess the reported up 13 basis points. What part of that or what portion of that was from interest recoveries?

Was about 2 basis points.

Okay. And the 244 core excludes that. Is that right?

Yes.

Okay.

So its 2 basis points from the interest recovery, 1 basis points from PPP loans.

Yes. Right. Thank you. Do you have a June monthly margin? What the margin was for the month of June?

We do believe – we don't normally disclose on a monthly basis.

Safe to assume the trends was upward throughout the quarter.

Yes, it was.

Got it. Maybe Peter, a question on the international visitors, and any thoughts on kind of resumption of activity there. I guess that you could throw out differences in of the domestic spend, but locally, what are the kind of the headwinds there and what are the expectations for some – I mean, the numbers are great and coming back, but we still haven't seen the international side as much. So any thoughts on that end?

Yes. It's going to be – it maybe a while, Jeff. So Canada, Japan, Korea, and kind of a smattering of other countries make up the international segment. That together generates about 35% of arrivals and 35% of spend. And what we have happening right now is that number is less than half of what it is, what it has been traditionally kind of headlined by the Japanese who are down over 90% and the Koreans who are down, not quite as bad as that, but pretty bad, kind of offsetting that, Canadians are kind of effectively bounced back at this point. So that's positive. And Australians are kind of newly able to leave their country and we're seeing good fraction there. So I think that it's Japan and Korea, it's kind of anybody's guess. I think that’s the combination of both kind of health issues and conditions, and I understand Japan's kind of, again, starting to have some viral issues, COVID issues. But I also think it's also, just policy, right. And I can only imagine that the domestic Japanese visitor industry quite appreciates having all of their residents in house, if you will. So I don't know. I mean, I think eventually the business will come back, that's for sure. We know that. But kind of predicting which quarter might be a little bit more of a [indiscernible] area than perhaps we thought previously. When I talked to hotel professionals, a number of them are kind of thinking kind of beginning first quarter next year. And I think probably the sentiment had previously been kind of summer to later 2022. So that's a bit of a push out. But if we kind of zoom out a bit and take a look at the macro environment, we've got so much domestic traffic right now that almost is somewhat of a blessing that we don't have the international market back as strong as obviously eventually we want because I'm just not sure where we would put all of those people. I mean, we're at 92% in June by arrivals and over a 100% by visitor spend. So the way I look at it is the international market is going to get back. I can only imagine that certainly the Japanese visitor is really anxious to get back to Hawaii, which as you know, they've got a deep and long standing love affair with. And potentially as we start to see a little softening in the U.S. domestic side, that might be kind of a nice fold in for us as we move forward.

Yes. Makes some sense. Thanks, Peter.

Yes. Thank you.

Thank you. We have a follow-up question from the line of Andrew. Your line is open.

Thanks so much. Yes, just question here on capital and the buyback. And I know that the regulatory ratios of the – where you focus the most on, but with the TCE ratio below 5%, what's the appetite to continue buying back shares here?

Yes. I mean the buyback still continues to be important part of our capital management program. Right now – even though we've taken another reduction in our capital because of the AOCI component, it still hasn't affected our capital distribution plans, continued to expect kind of a modest repurchase program going forward similar to the levels that we had in the last several quarters.

Got it. All right. Yes, thank you for taking the follow-up.

Okay. Thanks Andrew.

Thank you. We have a follow-up question from the line of Kelly Motta with KBW.

Hi. Thank you so much for the follow-up. Just a really small housekeeping item, with your fee guidance, I caught that it excludes the Visa Class B share adjustment. Last quarter, I think it was 42 to 43. I assume that also was excluding the Visa adjustment, but I just wanted to clarify that you model that out?

Yes. When you say excluded, the 41 to 42 includes the adjustment. So therefore on a normalized basis, it would be 42 to 43. So roughly the same guidance that we had previous quarters.

Okay. Got it. Thank you very much.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Jennifer for closing remarks.

Thank 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 additional questions or need further clarifications on any of the topics discussed today. Thank you, everyone.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.