Ladies and gentlemen, thank you for standing by. Welcome to Bank of Hawaii Corporation Fourth 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 like now to turn the conference over to Cindy Wyrick, Director of Investor Relations. Please go ahead.

Thank you, and welcome everyone. Thank you for joining us today as we discuss the financial results for the fourth quarter and the full year of 2023. Joining me today is our CEO, Peter Ho; our CFO, Dean Shigemura; our Chief Risk Officer, Mary Sellers; Vice Chair and Deputy Risk Officer, Brad Shairson; and our Manager of Investor Relations, Chang Park. Before we get started, let me remind you that today's conference call will contain some forward-looking statements. While we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected. During the call, we'll be referencing a slide presentation as well as the earnings release. Both of these are available on our website, boh.com, under the investor relations link. 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. Bank of Hawaii produced another solid financial performance for the fourth quarter of 2023. Average deposits grew for the second consecutive quarter, up 1% on a linked basis and up 1.8% year-over-year. Loans were again flat in the quarter. Margins ebbed in the quarter with NIM of 2.13%, flat to the second quarter. Expenses outside of the industry-wide FDIC special assessment were well controlled and fee income was solid. Capital is measured by Tier 1, CET1. Total capital and Tier 1 leverage continue to improve. Credit remains a strong story. I'll start off with some commentary on funding and liquidity, and then touch on broader market conditions in Hawaii. I'll then hand the call over to Mary, as is our custom to discuss credit, and Dean will then share with you some more granular color on the financials. So let me touch a little bit on our deposits. I think as many of you know, we consider our deposit base to be the crown jewel of the franchise, built slowly over 125 years of our history in the islands, one relationship at a time. As most of you know, Hawaii is maybe the most unique deposit market in the country, where five locally headquartered banks hold 97% of the states FDIC-reported deposits. As I mentioned, we have an amazing tenure in our deposit relationships, with 53% of our deposits with a tenure of 20 years or more, and 75% of our deposits having a tenure of 10 years or more. Despite the volatility created by the regional bank crisis in the first quarter of 2023, both average and spot balances have been steady and growing throughout the year. Further, non-interest bearing deposits have begun…

Yes. Thanks, Peter. I would like to just take a moment to say that I feel fortunate to have had the opportunity to work for Mary for the past several months through our planned transition. And I can see the incredible legacy that she'll be leaving behind. I also feel fortunate that under her leadership she will also be leaving behind a portfolio with such strong asset quality. And I plan to do my best to continue in her footsteps and maintain that same disciplined approach to managing risk. All of that said, let's turn this back to Mary, so she can do this one last time.

Thank you, Brad, and, Peter, for your kind remarks. First, I must say, though, that credit for our strong and consistently strong credit quality goes to the entire team, particularly our line management, our relationships managers and our credit team, as well as probably most importantly to our customers. Brad, I've enjoyed working with you during the transition. You've been a terrific partner. I'm pleased to leave it in your capable hands and I'm sure you'll do a terrific job. Now onto the usual stuff. First, Bank of Hawaii's lending philosophy is grounded in two fundamental tenants. We lend to long-standing relationships that we understand in our core markets of Hawaii and the West Pacific. We combine this with ongoing disciplined portfolio management, actively exiting those products or segments that have proven to be higher risk. This positions our portfolio for continued lower net charge-offs through different economic cycles. The 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 loan to value of 54%. Our commercial real estate portfolios, which represent 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 55%. 23% of the portfolio is in the downtown Honolulu Central Business District. This segment has a weighted average 60% loan to value and 43% of the exposure is further supported by repayment guarantees. 4% of the loans in the office segment are maturing through 2025. While not immune from the changing dynamics impacting…

Thank you Mary. And congratulations on your upcoming retirement. To better balance our interest rate sensitivity profile, in the fourth quarter we added an additional $1 billion of notional pay fixed received float interest rate swaps for a total of $3 billion notional. In addition, we continued to originate a greater proportion of floating and adjustable rate loans that hold more Fed funds sold. These actions have increased our floating rate assets exposure to 45% from 27% at the end of 2022 and positioned us well for this uncertain rate environment. Net interest income was $115.8 million in the fourth quarter, a decrease of $5.1 million linked quarter. As the regional bank crisis unfolded, we fortified our balance sheet in the second quarter by adding liquidity. As uncertainty decreased and our core deposits remained strong, we reduced the on balance sheet liquidity in the third quarter by reducing wholesale and non-core funding by $2.2 billion. These actions reduced our balance sheet leverage and improved our capital position, but did reduce our earning asset base by $904 million on average in the fourth quarter. Net interest margin was stable linked quarter as asset repricing offset higher deposit costs. We continued to exercise deposit pricing discipline, while growing total balances, as evidenced by our deposit beta of continuing to outperform that of peer banks. As of December 2023, our cumulative total deposit beta was 31.6%. We believe that our deposit betas have peaked in the fourth quarter as our deposit rates began to flatten and non-interest bearing deposits have stabilized at 27% to 28% of total deposits. In addition, lower cost and more granular consumer deposits increased on average by $129 million linked quarter. We expect this trend to continue into 2024. Our assets continue to reprice higher, supporting net interest income…

Thanks, Dean. That concludes our prepared remarks. We'll be happy to take your questions.

Thank you. [Operator Instructions] The first question comes from Jeff Rulis with D.A. Davidson. Your line is now open.

Thanks. Good morning. Peter, I think you mentioned the increase – well, the non-interest-bearing deposits spot quarter-end up, up considerably, I think you mentioned, pretty flat November to December. I just want to kind of get a sense for, was that still need to, like, Maui fire-related, insurance payouts or anything that kind of came in early part of the quarter that led to that increase in noninterest bearing?

Yeah, Jeff, the quarter-end spot, as you know, December oftentimes is kind of a funny quarter-end, because it is a year-end. And we saw probably, I want to say, $300 million, $400 million of stuff just kind of pop in and out. Some of that was in noninterest bearing, which is in part why you saw that jump up. Kind of the better number to look on just to understand the spot, I think, is the average NIBD for the quarter was 5 point -- just about $5.7 billion and that compares to $5.8 billion for the third quarter. So a real flattening there. And I would anticipate, Jeff, at least our early insight into this quarter, that number feels to be pretty stable.

Okay. So if I look at that average balance and you would not anticipate then some outflows of, again, kind of Maui-related. Was there any temporary in that? Or do you think the average is kind of balanced that out and from here it's…

Yes, we're hopeful that we can maintain that average NIBD’s balance of called $5.7 billion. Overall balances, I think, we're running about $20.6 right now. If we came through the quarter $20.6 billion, that would have surprised me on average balances. And yes, you're right, we do have -- there's probably $200 million, $300 million of Maui-related aid that's kind of flowing in and out of our balance sheet. And so, a little unpredictable, some of it in the NIB, most of it earning some quarterly yield though, thankfully for them.

Got it. Okay. And so, Dean, I guess if I -- that's all I consider that would be baked into the margin, maybe just a follow on to that. The cost of that hedge is, I don't know if you have that available, is there -- does that lean on margin a few basis points of kind of what you added in terms of -- what was added in the quarter, was that impactful?

It was accretive in terms of net interest income of about $5 million, So it did help us, but it does kind of neutralize or hedge our exposure at the short end.

Okay. So it was a short-term benefit and also balances out going forward. I guess the bigger question then, kind of you've mentioned the first quarter expectations. Could you just frame up, Dean, should we see second half of a cut or two or maybe kind of range bound if it's more than that, how you think margin generally trends all things being equal?

Yes, all things equal, we expect the margin -- from short-term changes in rates, we expect to be neutral. But what we're expecting is the - on the asset side to grow -- to increase from the just the asset repricing that we have, the cash flow coming off and be invested at much higher yields.

Sure. Okay, great. Well, I will step back and congrats Mary on the retirement and thank you for your help over the years. I appreciate it.

Thank you.

Please stand by for the next question. The next question comes from Andrew Liesch with Piper Sandler. Your line is now open.

Thanks. Hi, everyone. Dean, just a clarification question on the swaps here. Do you have what the pay and receive rates are right now?

We haven't disclosed it, and the average tenor is approximately 2.5 years. And just to clarify on the previous question, the $5 million is based on the $3 billion of total -- the total interest income from the $3 billion.

The incremental in the quarter was $1 billion, right?

Of swaps, yes.

So it would be some number less than a third, I'd call it.

Got it. All right. And then to start -- also clarification on the margin commentary with the Fed's cutting rates gradually should be pretty neutral to the margin, was that correct?

Yes.

Okay. And then just on the expense guide. Is that really just inflationary pressures pushing it higher, or is there anything else in the operating cost that we should be aware of as we look into 2024 as far as their own projects or other alternatively cost saving opportunities?

There's -- it's generally going to be inflationary pressures, there's some projects that are coming online, but generally it's going to be merit increases and the like for that, for the increase. Of course, we're continuing to look for opportunities to reduce the expenses as is always been our practice.

Andrew, let me ask you, on your question on margin, I just want to understand the context of the question. Was it, as the Fed or if and as the Fed reduces short rates, what will the impact be on our NIM? Is that the question?

Yes. I think it's pretty clear that flat or no change in the rate environment with the repricing, we have a few basis points of expansion. But if the Fed starts to lower the short end, what does that mean to the margin? Is there enough repricing differential on what's maturing and being reinvested to offset maybe any of the adjustable available rate product?

Yes. I mean, the way I think about it, and Dean you can clean up whatever I say here, is that kind of higher for longer would work, it would be, okay, it would kind of leave our margins stable up modestly. Fed cutting rates, let's just call it conservatively, over time would obviously hurt the floating portion of our earning assets. But then over time results in lower funding costs, right? So we think -- kind of the upshot of that over a reasonably short period of time, adjustment period, is that we've seen an improvement in our NIM.

Yeah. Got it. All right. That makes sense. Very helpful. Thanks for taking the questions [Multiple Speakers]

Yes, just to be clear on that -- yes, the short end, when I mentioned that we're effectively hedged, what that also means is that, we do continue to see repricing on the assets side, so even if the Fed were to cut rates, we would expect the margin to continue increasing.

Got it. Okay. Very helpful. Thanks so much.

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

Hi, thanks so much for the question. I hate to beat a dead horse here with the margin, but I just want to make sure I'm understanding what you both are saying correctly. It seems like it's clear, higher for longer, you'll continue to level up on margin. It seems like with some moderate cuts, am I understanding correctly, Dean, you still think it'll continue to go up initially or could we at least in the first quarter or two see some compression as that variable rate portion at now about 45% resets lower immediately to that change in rates? Just trying to square away both of your comments there.

Yes, and the way we look at it is, we've -- I've separated out the floating rate assets from what is repricing in the cash flow. So the asset repricing from cash flows is going to continue to increase our margin. The floating rate assets offsetting the decrease in what we -- on the liability side, the deposit side, we would be bringing down our deposits as well and the rates. So those two would [move lower] (ph) with an opportunity to -- on the deposit side to reduce that further.

Yes. But you're right, there is a timing issue, right. Because as soon as the Fed drops rates, that will contractually drop margins -- certain margins on our earning assets, and it will take us a period of time to bring down those rates within our deposit book. So there could be -- there could be that intermediary period, Kelly, but we do think that over reasonable short order, we should be able to kind of get margin expansion out of lower interest rates.

Got it. And I appreciate the commentary that the average tenor of the swaps is 2.5 years. Can you help me understand how that impacts that AOCI accretion back to capital? I think that may have muted some of the benefit to tangible book value this quarter. It's the right way to think about it -- we'll start seeing a greater portion of that come back, provide rates move lower after that 2.5 year average header is up, just trying to better understand kind of the cadence of how that will impact that [indiscernible] back of AOCI.

So the swaps, about $1.3 billion of swaps are hedging the AFS portfolio, so not the entire $3 billion. And so, when -- it's approximately about 30% of a hedge, so it does mitigate the movement up or down and then over time as you recognize that will reduce, the 30% will fall over time if we did nothing. Now it is going to be more active program, but 30% right now is the hedge.

Okay. Got it. Maybe switching to the balance sheet and loan growth. Just wondering, if you look out to the next year, how we should be thinking about your expectations for loan growth on the island, as well as what we could potentially see coming out of Maui, both with -- how that potentially impacts the tourism impact, as well as just the rebuild there and how that fits into that loan growth expectation?

Well, let's talk about Maui first. I think most of the funding coming into Maui right now and activity is around relief efforts today. The rebuild of Maui is still awful ways off Kelly. So probably -- it's probably just not even constructive to hypothesize what economic impact that might have at this time, but from a visitor perspective the state is performing well. Maui is coming back a lot faster than people had anticipated. At least that's the kind of the anecdotal that I get from that part of the state. So I don't think that there's going to be too much of a shortfall activity-wise coming out of any form of tourism shortfall generated by the wildfires over -- kind of over the next several, several months. And then just in terms of the ability for the long-term stimulus impact of the rebuild of Lahaina to kick in, I think that's still a ways off, because we just don't -- we don't even really have a design yet on what all that project potentially could or would look like. So again, probably just too early to determine.

Got it. Thanks for the color. And then I guess excluding Maui, how should we be thinking about the outlook for growth next year.

Yes, we think that long growth similar to last quarter's view is going to be reasonably tepid. I mean, unless the Fed just gets really aggressive with rate cuts, which we're not anticipating. I think that the consumer is still going to be impacted somewhat by what they perceive to be higher rates. Interestingly, mortgage rates in the low sixes don't seem to be too terribly outside of historical norm if you go back years and years, but still I think that's having a negative impact on demand on the consumer front. We did have a reasonably good C&I quarter, so there is activity in the marketplace. Construction had a reasonable quarter as well, though that's a small portfolio with a lot of our low income housing projects. But we're really kind of the big driver of our commercial portfolios, commercial real estate. And people there are -- the market's doing fine, but transactionally, I think, people are just kind of sitting on their hands for now and waiting to see which way interest rates take out, which way the recession or the economy shakes out recession or expansion or just kind of soft landing. So I wouldn't anticipate a whole lot of activity before -- until maybe the backend of this year.

Got it. I appreciate all the color. I'll step back. Thanks again.

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

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

This concludes today's conference call. Thank you for participating. You may now disconnect.