Good day, and thank you for standing by. Welcome to Bank of Hawaii Corporation Fourth Quarter 2024 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 today, Chang Park, Director of Investor Relations. Please go ahead.

Good morning, and good afternoon. Thank you for joining us today for our fourth quarter 2024 earnings conference call. Joining me today is our Chairman and CEO, Peter Ho; President and Chief Banking Officer, Jim Polk; CFO, Dean Shigemura; Chief Risk Officer, Brad Shairson; and our Deputy CFO, Brad Satenberg. 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 today, we will be referencing our 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'll turn the call over to Peter.

Thanks, Chang. Good morning and good afternoon, everyone. Thanks for joining the call. Bank of Hawaii posted yet another solid quarter to end 2024. Net interest income and net interest margin both improved, this for the third consecutive quarter. Net interest income grew just over 2% on a linked basis to $120.2 million. Non-interest income, excluding an adjustment to our Visa Class B shares was up modestly on a linked basis. Expenses were controlled quarter-over-quarter. Average deposits and average loans grew 1.3% and 1.1% on a linked basis to $20.8 billion and $14 billion, respectively. Average non-interest bearing deposits were up modestly in the quarter. Credit quality remained pristine in the quarter with net charge-offs and NPAs improving to 9 basis points and 14 basis points, respectively. Criticized loans improved from 2.42% last quarter to 2.1% this quarter. Capital levels have improved substantially from a year ago. I'll now take a moment to discuss the franchise and market conditions. Brad will then briefly touch on credit conditions, which, as I mentioned, look quite strong. And finally, Dean will dig a little deeper into the financials and then we'd be happy to take your questions. The Bank of Hawaii brand continues to perform well in our unique Hawaii market, holding the number one position in market share as shown in the latest FDIC annual summary of deposits as of June 2024. Bank of Hawaii leads in the deposit market share growth on both a short-term and long-term basis. Deposit growth remained measured in the quarter. Importantly, non-interest bearing demand plus other low-yield deposits stabilized nicely, trending positively in December on a rolling three-month average basis for the first time since June of 2022. Deposit funding costs fell for the first time this rate cycle on both in interest-bearing and total deposit cost basis. Economic conditions remain stable in Hawaii. Unemployment remains well below the national average. The visitor market remains stable, but continues to be impacted somewhat by the Maui market. Residential Oahu real-estate trends remain positive. Now let me turn the call over to Brad.

Thanks, Peter. So the Bank of Hawaii prioritizes serving our community, lending in our core markets where our expertise enables us to make sound credit decisions. The majority of our loan book is to long-standing relationships with about 60% of our clients on both the commercial and consumer sides, having been with us for over 10 years. This combination has greatly contributed to our strong credit performance for many years and has resulted in a loan portfolio that is 93% Hawaii, 4% Western Pacific and 3% Mainland where we support our clients that do business in both Hawaii and on the Mainland. As I walk through our credit portfolio's fourth quarter performance, you can see that it has remained strong and is consistent with prior quarters. Our loan book is balanced between consumer and commercial with consumer representing a little over half of total loans at 56% or $8 billion. We lend predominantly on a secured basis against real-estate. 85% of our consumer portfolio is either residential mortgage or home equity with a weighted average LTV of just 48% and a combined weighted average FICO score of 800. The remaining 15% of consumer consists of auto and personal loans where our average FICO scores are 733 and 760, respectively. Moving on to commercial, our portfolio size is $6.1 billion or 44% of total loans. The largest share of commercial is commercial real-estate with $4 billion in assets, which equates to 29% of total loans. This book is well-diversified across industries and carries a weighted average LTV of only 55%. Looking at the dynamics for Hawaiian real-estate in Oahu, the largest market, you will see that a combination of consistent vacancy rates and little change in inventory supports a stable real-estate market. Within the different segments, vacancy rates for industrial, retail…

Thanks, Brad. We expanded our net interest income and net interest margin for the third consecutive quarter. Net interest income for the fourth quarter was $120.2 million, an increase of $2.6 million or 2.2% from the previous quarter and net interest margin expanded to 2.19%. During the quarter, our NIM initially decreased in October, primarily due to the negative short-term impact of the 50 basis-point Fed funds rate cut in September, also negatively impacting the margin were higher cost commercial and public deposits that were carried over from the third quarter and ran off in October and November. NIM improved to 2.26% by December, driven by repricing of asset cash flows, a decrease in average cost of total deposits to 1.67% and slowing of our NIBD and low-cost deposit remix. With regard to cash-flow repricing, in the fourth quarter, our earning assets with fixed rates generated $518 million of cash flows from maturities and prepayments. Assuming that all of these cash flows from loans were reinvested into like products and cash flows from securities were reinvested into cash, such reinvestment generated incremental net interest income of approximately $2.8 million in the quarter from higher reinvestment yields. Spreads on new loans improved after bottoming in October as mid and longer-term interest rates increased. We expect the wider loan spreads to continue into the first quarter. At the same time, deposit mix-shift has continued to slow with average non-interest bearing and low-yield interest bearing deposit balances declining by $105 million linked quarter. This compares to the decline of $627 million and $315 million in the same period of 2023 and linked quarter, respectively. Assuming the majority of these balances shifted into higher yielding interest bearing deposits, such mix shifts negatively impacted net interest income by $900,000 in the fourth quarter, down from…

Thanks, Dean. This concludes our prepared remarks. Now we'd be happy to entertain whatever questions you might have.

Thank you. [Operator Instructions] Our first question comes from the line of Jeff Rulis from D.A. Davidson.

Thanks. Good morning.

Good morning, Jeff.

Dean, if I could -- a lot of color on the margin, appreciate it. I guess that 2.26% for December, is that a pretty good jump off point? If we kind of start there, any kind of one-timers or is that a good rate and then adjust for sort of the positive influences that you talked about that bleed into this year?

Yes. The fourth -- December margin of 2.26% was a pretty clean number. And as you say, it is a good jumping-off point for the first quarter. So in addition to that, we'll be seeing the asset repricing to continue. And actually some benefits from the last repricing on our Fed funds cut as it reprices our deposits.

Right. It sounded as if you're active in some deposit rate lowering that so far this year as well.

Yes, yes.

Okay. Got it. Okay. Thank you. Next topic, just wanted to just check-in on kind of the loan growth pipeline and I -- anyone can hop in. I guess, Peter, kind of interested in not only just a pipeline update and your thoughts, but also any sort of ripple effect of any M&A that's occurred on the island and the ASB sale, maybe pretty early, but if you could feather that into the pipeline discussion, that would be great. May be no effect at all as well.

Sure. So we were reasonably okay with loan growth for the quarter, really headlined by commercial growth, as you can see, Jeff. Consumer was just kind of moving sideways, frankly. And I think that's probably likely to be the case this year unless we get a little relief around rates, which I think might have the potential to boost levels. The good news is the back book on commercial remains strong. So we would not be surprised to see a performance in the next quarter or so, similar what we see -- what we saw in the fourth quarter. As it relates to what's happening in the marketplace. We're not really seeing any active change in how competition is forming out here. So probably way too early to notice anything to be frank. But frankly, we're also not really anticipating much change either.

Okay. Thanks, Peter. I'll step back.

Thank you. One moment for our next question. Our next question comes from the line of Jared Shaw from Barclays. Please go ahead.

Hey, good morning, everybody.

Hey, Jared.

I guess a few things. Maybe when you look at the movement on the hedges this quarter, are you still targeting sort of a 60% fixed-rate mix in that fixed to float or is that coming down with these moves?

No, I think where we ended the quarter at about 57% is where we're at least in the near-term looking to mean remain. Obviously, if rates do shift quite significantly, we could change it. But right now, it is 57%.

Okay. So that's a good level then you keep going.

Yes.

And then just looking at the office, the office book, you have 36% of that coming due next year. What's the -- any level of conversation with those borrowers? What's the expectation for when those come due that -- is that likely to be renewed? Are you seeing people put more equity in? What's the outlook there?

So I'll just really quickly say that we're not seeing any issue with any of those renewals. So at this point, everything looks really good and strong on office. And really just, I guess to speak about credit in general, as you can tell, it was kind of a boring quarter, which I guess is a good thing. But we're really seeing just good stability overall, both on commercial and consumer and that includes our CRE portfolio and of course, which then includes office space. So no real issues there.

And I think the maturity is by my recollection, I think it's 39% by 2027. So it's not quite as concentrated as what you wanted there, Jared. But still, I mean we do have some payoffs coming up in the next couple of years. And as Brad mentioned, we're feeling pretty good about that.

Okay. All right. Thanks. And then just I guess finally for me, looking at capital continues to be very robust on the regulatory side. What would have to happen, I guess, for you to be more active with the buyback here.

A little cleaner line-of-sight into credit, the economy and rates, I'd say. So I think we're -- I think we're quite satisfied with the capital build over the past year and I think levels where they are appropriate to kind of the environment that we see. But having said that, Jared, I would also probably throw in there that we think that there's a fair amount of opportunity for what I'd say is heightened variability across all of those factors. And I think as long as that continues to trend, we're probably likely to hold-off on the buyback for the foreseeable future.

So if we don't see changes in credit economy or rates, that's like -- then capital ratios are likely to still build through 2025.

Yes, through retained earnings is probably accurate less dividends.

Okay. Great. That was what I had. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Andrew Liesch from Piper Sandler Company.

Hey, good morning, everyone. Thanks for taking the questions here. Just a follow-up on the revenue enhancing initiatives that you've mentioned in the expense section, in the expense outlook. I mean, what sort of initiatives might this include?

I don't want to get into the specifics, but it is directed at our commercial and wealth areas, but definitely accretive to the earnings stream this year and then into next.

Got it. Is it like software upgrades just to make them more efficient and then enhance revenue that way, just kind [Multiple Speakers]. Okay.

Yeah. Let me take a stab at that. So, as I think you know, we've been really putting an emphasis on building our wealth operation up to the same market scale capability as our consumer and commercial businesses. And we've had good success over the past couple of years. This, I think in the fourth quarter -- year-on-year, our trust and broker sales revenues were up just over 9%. So pleased with that. As Dean alluded to, we do have what I'd term interesting things planned for 2025 that I think are going to enhance that improvement even more so, but nothing really to report specifically at this point, but we are excited about the space.

Got it. You've covered all my other questions. I'll step back. Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Andrew Tyrrell from Stephens. Please go ahead.

Hey, good morning.

Hi, Andrew.

If I can go back to some of the margin just quickly, for the $2 billion of swaps that are active and remaining, can you just remind us that the share between the securities portfolio -- how much is allocated to the securities portfolio versus how much against the loan portfolio?

In terms of the allocation, it's -- sorry, I should know this. It's about $600 million against -- $700 million against the AFS and $1.3 billion against the loan portfolio?

Got it. Okay. And then if I go back to just some of the repricing benefits, and I appreciate all the color there. But if I just think about what you guys have experienced over the past year, call it, that $16 million of quarterly repricing. Margin wise, that's right at 30 basis points of NIM. So I guess if we're expecting that to continue, plus you should have some deposit repricing benefits carrying forward into 1Q, you're starting margins at a good level. Do you think you can exit 2025 at, call it, a 2.5% or better type margin?

Andrew, it's Peter here. That is a trend possibility, I would say. A lot of things have to go right for that to happen. But I would say that from an NII standpoint, we're pleased with what we see in terms of the diversity of opportunities to build that number. So the balance sheet turnover, as you know and understand is a good story and a cumulative accreting story. And we are -- I'd say with the interest rate cuts that we did get towards the back-half of last year, we're really pleased with both market reaction, as well as kind of the pricing that we're seeing on our own -- in our own book. So yes, I don't want to throw -- I don't want to put a line in the sand out there, but directionally, I think that's reasonably accurate. But as I mentioned, a number of things have got to go right for that to happen.

Yes, certainly. And I can appreciate that. On the CD portfolio, I think in the presentation, you guys called out it was close to half of the time deposits repriced or matured in the first quarter or will mature in the first quarter. It called that [4.10%] (ph) cost or so. What's the current offering rate for you guys right now? And what would you expect these CDs to reprice during the first-quarter?

So the current offering is around 3…

Directionally we want to come down, but obviously, you can appreciate that we're not going to get specifically into direct pricing, Andrew.

Okay, fair enough. Lastly, did you just have the medical costs in fourth quarter, the dollar amount that you guys called out in the release?

$1.4 million. I'm sorry, 2.2…

It's $1.5 million. The increase was about $1.5 million.

Okay. Thank you for taking the questions.

Thank you. One moment for our next question. Our next question comes from the line of Kelly Motta from KBW.

Hey, good morning. Maybe switching back to the loan side of things, you've now had two nice quarters of growth. Wondering what you guys are seeing in terms of the pipelines and it sounds like you're very optimistic about your expectation for NII growth through next year. Wondering how much of that is based on -- excuse me, is that factors in any sort of growth on the loan side?

Yeah. So maybe I'll tackle -- this is Jim. I'll tackle the pipeline side. We actually began to see a lot of growth in the commercial pipelines around Q2 of last year, which led -- which led to a good Q3 and a particularly strong Q4. That was the strongest production quarter we've had since 2002. Deal flow continues to be active and I think we see the opportunity for continued growth in the commercial loan space. So, I think we feel pretty good. And maybe I'd just add for some color, it was really a good mix of C&I and CRE and a bunch of different asset classes to core clients with really good credit underwriting statistics. So I think we feel really good about that, kind of keep us on path for sort of that mid-single digit growth as we look for this next year.

Yes, I guess I would add, Kelly, that we -- obviously, we're hopeful of continued loan growth that would be accretive to NII. But really the thing that we're really focused on in the NII space is the diversity of opportunities in that space. So loan growth definitely contributory if -- to the extent that we get it. But really just deposit growth, given where the slope of the yield curve has moved to in a reasonably short period of time would be highly-accretive for us. And then kind of back to the balance sheet turnover and just the overall reduction in Fed funds and the ability to create some margin out of that gives us a pretty interesting diversity of options around NII.

Got it. That's helpful. And I think you may have -- please correct me if I'm wrong, but I think you may have some FHLB maturing potentially this year. Wondering how you guys are thinking about managing that if potentially deposit growth could help pay-down some of that or potentially taking on some new self-funding asset replacement?

Yes. We don't have any maturities this year. The first maturities are in 2020 -- next year 2026.

We do have the opportunity to prepay to the extend we wanted to.

Right. Yes. And that's something we actively look at because it's -- the current rates are [4.13] (ph), I believe. So still accretive to NII. So as we get closer, we may choose to reposition that. But right now, the first maturity is in 2026.

Got it. Thank you. I will step back. Nice quarter, guys.

Thank you. End of Q&A

Thank you. At this time, I would now like to turn the conference back over to Chang Park for closing remarks.

Thank you for joining us today. And as always, please feel free-to reach-out to me if you have any additional questions. Thank you.

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