Good day and welcome to the Bank of Hawaii Corporation Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's 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 today, Cindy Wyrick, Director of Investor Relations. Please go ahead.

Thank you. Good morning, good afternoon, everyone and thank you for joining us today as we discuss the financial results for the third quarter of 2023. Joining me today is our CEO, Peter Ho; our CFO, Dean Shigemura; our CRO, Mary Sellers; and our IR Manager, Chang Park. 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 this morning, we will be referencing a slide presentation as well as the earnings release, both of which are available on our website, boh.com, under the Investor Relations tab. And now I'd like to turn the call over to Peter Ho. Peter?

Thanks, Cindy. Good morning or good afternoon, everyone. We appreciate your interest in Bank of Hawaii. Before we begin, I'd like to acknowledge the tragic events of August 8 on Maui and in particular, in Lahaina. We are so fortunate that all of our employees on Maui are safe. Unfortunately, our Lahaina branch was destroyed. I'm incredibly proud of and thankful for our Maui leadership team who immediately mobilized into action as the tragedy unfolded, providing support to our affected employees, our customers and the broader Maui community. Here in Oahu, over 100 of our staff have teamed with Hawaii Community Foundation, provide processing support for the Maui Strong Relief Fund, which now totals over $150 million. The recovery of Lahaina will take both time and patience. Bank of Hawaii intends to be there every step of the way. Now onto the quarter. We produced another solid financial performance for the third quarter. Average deposits grew nicely in the quarter. Loan levels were flat. Margin continued to be pressured by the inversion in the curve, although we witnessed a material slowdown in margin erosion compared to the prior quarter. Expenses were well controlled, and we improved our capital levels meaningfully. Credit, as Mary will share with you, remains a very good story for us. I'll start off with some commentary on funding and then touch on broader market conditions in Hawaii. I'll then hand it over to Mary, who will discuss credit, including the impact of the Lahaina wildfires, and then Dean will then share with you some more granular color on the financials. So why don't we start, Chang, with the deposit market share slide. This is generally where I like to begin. And just to remind the audience that Hawaii is an interesting deposit market. It's a market…

Thank you, Peter. Bank of Hawaii's lending philosophy is grounded in two fundamental tenets, lending in our core markets of Hawaii and the West Pacific and to long-standing relationships we understand. We combine this with ongoing disciplined portfolio management, actively exiting those products or segments that have proven to have higher risk profiles. This positions our portfolio for continued lower net charge-offs through different economic cycles. Our loan portfolio is built on long-tenured relationships diversified by asset categories with 59% consumer and 41% commercial has appropriately sized exposures and is 79% secured with real estate with a combined weighted average LTV of 55%. Our commercial real estate portfolio, which represents 27% of the total loan portfolio is diversified across the various asset types. The portfolio built on relationships with demonstrated experience and financial capacity is conservatively leveraged with a weighted average loan to value of 55%. Our office portfolio is granular and has a weighted average loan-to-value of 56%. 25% of the portfolio is in the downtown Honolulu Central Business District. This segment has a weighted average loan-to-value of 63% and 47% of the exposure is further supported by repayment guarantees. 2% of loans in the Office segment are maturing through 2024. While not immune from the changing dynamics impacting the office markets across the US, vacancy and rents remain stable in the Oahu office market as conversions to alternative use continue to reduce overall inventory levels as denoted in the gray bars. In the last five years alone, approximately 1 million square feet of inventory has been removed. Hawaii's supply constraints driven off its unique geography and onerous regulatory process serves to create relative stability in our real estate markets over the long-term and less volatility during periods of stress. This is particularly pronounced in the housing sector, where…

Thank you, Mary. Net interest income was $120.9 million in the third quarter, a decrease of $3.4 million linked quarter. Net interest margin was 2.13%, a decrease of nine basis points linked quarter. Linked quarter decreases in both net interest income and margin were primarily due to higher funding costs partially offset by higher asset yields as the inverted yield curve at higher short-term rates continue to pressure our income and margin. We continue to exercise the positive pricing discipline as evidenced by our deposit beta continuing to outperform that of peer banks. As of the third quarter of 2023, our cumulative total deposit beta was 26%. We expect our deposit beta through the cycle to be 28% to 30%, which is consistent with our prior guidance, but also incorporates the potential that we made -- that we may achieve a modestly lower level. In the third quarter, deposit rates exhibited early signs of stabilizing. However, we are continuing to expect a moderate further mix shift from noninterest-bearing deposits, which represented 27% of our total deposits as of the end of the quarter to interest-bearing savings and time deposits. To better position ourselves for higher for longer interest rates and actively manage our asset duration, we added $1.8 billion notional of pay fixed received float swaps in the quarter to hedge a portion of our fixed rate loan available-for-sale securities portfolios, bringing our total swap portfolio to $2 billion at the end of the third quarter. In October, we continued to improve our position with an additional $500 million notional, bringing our current total swap portfolio to $2.5 billion. The additional -- the addition of swaps has increased the floating and adjustable portion of our earning assets to 41% from 27% at the beginning of the year and reduces the…

Thanks, Dean. So that does it for prepared remarks. And now we'd be happy to answer whatever questions you might have.

At this time, we'll conduct a question-and-answer session. [Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson. Your line is open.

Thanks. Good morning.

Hi, Jeff.

Maybe just wanted to check in on deposit flows, a pretty good deposit increase in the quarter. I wanted to see if you get a sense for what of that was maybe from potentially local banks tied to Hawaiian Electric or have you seen any kind of it might be early, but sort of FEMA related inflows. Anything on as it relates to deposits?

Yes. Good question, Jeff. And you saw -- so deposits were pretty elevated on an average basis for the quarter. And then you saw that there was a pretty meaningful spike up there on spot basis at quarter end, right? And to your point, some of that was, in fact, what I would call Maui wildfire-related stuff. So some insurance proceeds flowing in, we are starting to see some federal evidence of federal monies, state monies, county monies, kind of lubricating what you can imagine is a pretty dynamic environment right now. So I would say that against that spot basis at quarter end, which is plus 300 versus the average for the quarter, maybe upwards of half of that would represent kind of Maui-related stuff. Now for planning purposes, I would probably reduce that out. But I do think longer term, we're just going to continue to see these somewhat idiosyncratic inflows and outflows of capital flowing as that situation begins to resolve itself and we move towards a rebuild phase on Maui.

Okay, Peter, and I appreciate it. I guess related to that, just I think that the noninterest-bearing level is, correct me, in the 26%, 27% range. I guess if you think that, that some of that is somewhat -- while the flows are may be temporary, I'm getting to the point of the kind of the bottom of that outflow. I think Dean has talked about potentially kind of a bottom in the fourth quarter, but I just wanted to check in on noninterest-bearing percentages, where do you think that bottoms out at?

Yes, it could be the kind of the -- those wildfire monies. I think portions of that might have been noninterest-bearing, not all of it. So that's a little money. I would say that as we look at noninterest-bearing for the quarter on average, we were down 2.9% average to average for Q3. That compares to 6.2% average for Q2 and 6.7% average for Q1. So we definitely are seeing a deceleration there. On an average basis, that took our noninterest-bearing down to 28.5%. And so I think we are -- I'm not sure we're ready to declare victory on bottoming there, but I think we're pretty close to where we probably ought to end.

Okay. Got it. And just the last one for me. Just a comment on the loan pipeline and kind of expectations of kind of growth into '24 if it -- it sounds like a pretty moderate environment, but any thoughts in the next year?

Yes. I think moderate is the right term, Jeff. Obviously, we think that rate is impacting parts -- large parts of the consumer segment. A fair amount of uncertainty swirling around with geopolitical issues and interest rates, I think getting in the way of a lot of commercial production getting done right now. And then finally I think what we've been reading or seeing is a bit of an uptick in sub-prime type lenders finding things a little bit more difficult. Now that doesn't really impact our portfolios. As you know, we really don't play in that space. But I think that kind of that sets up a lending environment that is really pretty modest. And so I would think that if we are flat to slightly up from, over the next year, that would be a reasonable outcome for us. Interesting, I'm not quite sure what the rebuild phase looks like, but there may be some opportunities in there, but we'll see.

Okay. Thank you.

Yeah. Take care.

One moment for our next question. Our next question comes from Andrew Liesch with Piper Sandler. Your line is open.

Hey, good morning, everyone. Thanks for taking the questions here. Appreciate the margin thoughts here in the near term, Dean, but how should we be looking at it going into next year? I mean, is there a benefit that you think might happen from -- if we do get another 25 basis point rate hike increase given the swaps you've added, how do you think the margin will trend here beyond the fourth quarter?

Yes. If we do get another rate increase, where it's -- for right now, we're neutral. Where we benefit is if the Fed is on hold and keeps rates higher for longer, that's where you'll see a margin expansion. With the hedges in place, we've, in effect, been able to neutralize the impact from the liability side.

Got it. All right. That's helpful there. And then on the securities loss trade in the quarter, just some details behind that. I guess how many securities did you sell? Any plan or reinvestment you can speak of and the earn back on that transaction? And then beyond that like any other plans to do any more loss trades similar to this one?

We continue to look at the market conditions and if conditions are right, we may do more. But right now, we don't have any plans to and don't see any need to. Regarding the sale, it was a mix of corporates and munis and the payback period is about three years for that. And then what it did give us though is kind of a relief on the risk-weighted asset side. So it was a capital accretive transaction for us.

Got it. All right. That is helpful. Thanks for taking the questions. I'll step back.

Take care.

[Operator Instructions] One moment for our next question. Our next question comes from Kelly Motta with KBW. Your line is open.

Hi. Good morning. Thanks so much for the question.

Hi, Kelly.

Hi. So I'm looking at your deposit balances, it looks like there was some really nice growth in the savings accounts. I was wondering if you were running any promotions at all during the quarter that helped boost that line.

We have been pretty aggressive in that particular space on the consumer side, Kelly. And we think there's -- we think that's a spot where we can deliver good value to customers seeking a little more flexibility in their funding, but at the same time, getting a quality rate and that translates back to us at a rate that is maybe a little bit more palatable than some of the higher end TCD levels. So, yes, that's a good space for us.

Got it. That's helpful. And thank you so much for walking through so much color on the swaps. Just wondering with the $1.8 billion you put on this quarter, what the timing was during the quarter that you made those actions and just wondering if that margin guidance includes the full impact or if some of that benefit we're seeing is the full quarter's impact of that strategy put in place?

Yes, Kelly, the swaps were put in place kind of throughout the quarter. So it wasn't you know it was kind of using a new -- quarter, average. And then the guidance does include that impact from -- and benefit from that.

Got it. That's helpful.

And keep in mind that we did add another $500 million in early October.

Right. Got it. Got it. And then I know this is a bit of a ways off, but how should we be thinking about your margin when if and when the Fed cuts rates, the KBW baseline, I think, we do have a rate cut or two at the end of the year. Just wondering if with those received floating now put into place if in the implementation of a rate cut, if there could be a near-term drag on margin from that when that -- if and when that happens? Thanks.

We don't expect, in fact, we continue to expect that we'll benefit from lower rates on the short end from that rate cuts.

Got it. Thanks for entertaining the question. I'll step back. Appreciate it.

Great. Thanks, Kelly.

Thank you. That concludes the question-and-answer session. At this time, I would like to turn it back to Cindy Wyrick for closing remarks.

Well, thank you, everyone, for joining us today and for your continued interest in Bank of Hawaii. As always, please feel free to reach out to either Chang or to me if you have any additional questions or need any further clarification on the topics discussed today. Thanks again, everyone, and have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.