Bank of Hawaii Corporation (BOH) Q3 2025 Earnings Call Transcript

Bank of Hawaii Corporation (NYSE: BOH) Q3 2025 Earnings Call dated Oct. 27, 2025

Corporate Participants:

Chang Park — Manager of Investor Relations

Peter Ho — Chairman & Chief Executive Officer

Brad Shairson — Chief Risk Officer

Bradley Satenberg — Vice Chair & Chief Financial Officer

Analysts:

Matthew Clark — Analyst

Kelly Motta — Analyst

Jeff Rulis — Analyst

Jared David Shaw — Analyst

Presentation:

Operator

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 speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference is being recorded.

I would now like to hand the conference over to your speaker today, Chang Park. Please go ahead.

Chang Park — Manager of Investor Relations

Good morning and good afternoon. Thank you for joining us today for our third quarter 2025 earnings conference call. Joining me today is our Chairman and CEO, Peter Ho; President and Chief Banking Officer, Jim Polk, CFO Brad Satenberg and Chief Risk Officer, Brad Shairson.

Before we get started, I want to remind you that today’s conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, the actual results may differ materially from those projected. During the call today, 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 would like to turn the call over to Peter.

Peter Ho — Chairman & Chief Executive Officer

Thanks, Chang. Good morning or good afternoon, everyone. Thank you for your continued interest in Bank of Hawaii. We recorded yet another set of strong results for the quarter. Fully diluted earnings per share were $1.20 per share, 29% higher than the results from a year ago and 13% higher than last quarter. Net interest margin improved for the sixth straight quarter, up 7 basis points to 2.46%. Return on common equity improved to 13.6% for the quarter. Average deposits increased by 7% annualized. End-of-period loans increased modestly. Credit quality remained and remains pristine. I’ll now touch on some operating highlights as well as an update on our wealth initiative.

Brad Shairson will briefly update you on credit quality, and Brad Satenberg will dive a little deeper into the financials. As a reminder, Bank of Hawaii has a unique business model. It creates superior risk-adjusted returns by leveraging our unique core Hawaii market, our dominant brand and market positions and our fortress risk profile. Our market-leading brand position is largely the driver of our market share outperformance. For the 2025 FDIC summary of deposits released last month, we advanced our #1 deposit market share position in Hawaii by 40 basis points as of 6/30/2025. Since 2005, Bank of Hawaii has grown market share by 600 basis points well in excess of any other competitor in the Hawaii market.

Interest-bearing deposit costs and total cost of funds both improved in the quarter. Also in the quarter, we remixed $594 million in fixed rate loans and investments from a roll-off rate of 4.1% and into a roll-on rate of 6.3%, helping to improve net interest margin. As I mentioned, Q3 was the sixth consecutive quarter of NIM expansion. We anticipate NIM to expand further for a number of quarters moving forward. Our Fortress credit position is a long-standing core attribute of Bank of Hawaii. The portfolio is diversified by product type, predominantly secured and possessing superior long-term loss rates. We dynamically manage our credit portfolio actively managing off loan categories that we find not to meet our stringent loss standards. We believe wealth management is a nice opportunity for us, and I’d like to highlight it further here. As you can see from this chart, our consumer and commercial businesses have grown steadily over the past 20 years. Wealth AUM growth, however, has lagged. With greater investment, we believe we can improve performance in local wealth segment.

Hawaii has a strong affluent marketplace relative to the broader U.S. market. The wealth segment is fragmented with Bank of Hawaii holding a small fraction of the market. We see an opportunity to leverage our dominant commercial and consumer market positions, along with our brand strength to build wealth market share. In the mass affluent space, we recently teamed with Cetera to help us modernize our broker-dealer platform. Our new platform named Bankoh Advisors will have meaningful technology, client experience and investment product enhancements over its predecessor operation. We believe the new platform will help us delight both clients and prospective advisers alike.

In the high net worth space, we believe stronger client coordination between our commercial and wealth teams will result in meaningful cross-marketing opportunities, especially in the SME segment. We’ve invested in numerous product and service resources geared specifically for this segment. We’ll have further updates for you all as our initiatives in this area season.

And now let me turn the call over to Brad Shairson, who will provide some brief overview comments on credit. Brad?

Brad Shairson — Chief Risk Officer

Thanks, Peter. The Bank of Hawaii is dedicated to serving our community, lending in our core markets where our expertise allows us to make sound credit decisions. Most of our loan book is comprised of long-standing relationships with approximately 60% of our clients in both commercial and consumer having been with us for over a decade. This combination has significantly contributed to our strong credit performance over the years, resulting in a loan portfolio that is 93% Hawaii, 4% Western Pacific and just 3% Mainland where we support our clients who conduct business both in Hawaii and on the Mainland. As I review our credit portfolio’s third quarter performance, you will see that it has remained strong and consistent with recent quarters.

Our loan book is balanced between consumer and commercial with consumer representing a little over half of total loans at 57% or $7.9 billion. We predominantly lend on a secured basis against real estate. 86% of our consumer portfolio consists of either residential mortgage or home equity with a weighted average LTV of just 48% and a combined weighted average FICO score of 799. The remaining 14% of consumer consists of auto and personal loans where our average FICO scores are 731 and 761, respectively.

Moving on to commercial. Our portfolio size is $6.1 billion or 43% of total loans. 73% is real estate secured with a weighted average LTV of only 55%. The largest segment of this book is commercial real estate with $4 billion in assets, which equates to 29% of total loans. Looking at the dynamics for real estate in Oahu, the state’s largest market, A combination of consistently low vacancy rates and flat inventory levels continue to support a stable real estate market. Within the different segments, vacancy rates for industrial, office, retail and multifamily are all below or close to their 10-year averages.

Total office space has decreased about 10% over the past 10 years. This has been driven by conversions primarily to multifamily and lodging. This long-term trend of office space reduction, along with the return to office movement. has brought the vacancy rate closer to its 10-year average and well below national averages. Breaking down our CRE portfolio, it is well diversified across property types with no sector representing more than 7% of total loans. Our conservative underwriting has been consistently applied with all weighted average LTVs under 60%. Not only is our CRE portfolio diversified across segments, but it is also diversified within each segment as evidenced by our low average loan sizes. And our scheduled maturities are fairly evenly spread out with more than half of our loans maturing in 2030 or later. Looking at the distribution of LTVs there isn’t much tail risk in our CRE portfolio. Only 1.8% of CRE loans have greater than 80% LTV.

Turning to C&I, which comprises 11% of our total loans you will notice that this book is also well diversified across industries and also has modest average loan sizes. Additionally, only a small portion of these loans are leveraged. Given recent industry news, we’ve added a slide to highlight our limited exposures to nondepository financial institutions and NDFIs. The loans fall within our C&I portfolio and equate to only 0.6% of total loans or $85 million. And of that $85 million, $74 million are to publicly traded equity REITs and just $11 million to private equity. Not only are the exposure small, but we know the borrowers well and are comfortable with our nominal exposure.

Turning to asset quality. Credit metrics have actually improved from last quarter’s pristine levels. Net charge-offs were just $2.6 million at 7 basis points of annualized flat to linked quarter and 4 basis points lower than a year ago. Nonperforming assets were down 1 basis point from the linked quarter to 12 basis points and 2 basis points lower than a year ago. Delinquencies ticked lower by 4 basis points to 29 basis points this quarter and 2 basis points lower than a year ago. Criticized loans dropped by 1 basis point to 2.05% of total loans, which is 37 basis points lower than a year ago and the vast majority, 83% of criticized assets are real estate secured with a weighted average LTV of 55%. As an update on the allowance for credit losses on loans and leases the ACL ended the quarter at $148.8 million. That’s up $240,000 for the linked quarter. The ratio of our ACL to outstandings remained flat at 1.06%.

I will now turn this over to Brad Satenberg for an update on our financials.

Bradley Satenberg — Vice Chair & Chief Financial Officer

Thanks, Brad. For the quarter, we reported net income of $53.3 million and a diluted EPS of $1.20 per share, an increase of $5.7 million and $0.14 per share compared to the linked quarter. These increases were primarily driven by the continued expansion of our net interest income and net interest margin, which grew by $7 million and 7 basis points, respectively. The expansion in both our NII and NIM was driven by the combination of our fixed asset repricing, which added $3.3 million for NII as well as growth in the average balance of our deposits and the successful repricing of our CD book. Partially offsetting these benefits was the deposit mix shift. During the third quarter, the mix shift was $104 million and had an $800,000 negative impact on our NII. The average mix shift during the first 3 quarters of this year declined by $350 million to $67 million per quarter compared to $417 million per quarter for the same period last year.

During the quarter, the yield on our interest-earning assets increased by 7 basis points, benefiting from an improvement in the yield on both our loan portfolio and securities portfolio. At the same time, the cost of our interest-bearing liabilities declined by 2 basis points driven by a modest decline in the cost of our deposits, which decreased to 159 basis points. The average cost was inflated during the quarter due to several large transitory high-cost deposits. The spot rate on our deposits was 154 basis points or 5 basis points lower than the average during the period. Our beta at the end of the quarter was 28%. And I believe that we will ultimately achieve a 35% beta after Fed funds hits its terminal rate. The repricing of our CD book will lag our nonmaturity deposits. During the quarter, the average cost of our deposits declined by 12 basis points, and I expect that the vast majority of our CDs will continue to reprice down. During the next 3 months, over 52% of our CDs will mature at an average rate of 3.5% and we’ll generally renew into new CDs at rates ranging from 2.5% to 3%.

The spot rate on our CD book at the end of the quarter was 3.32% or 8 basis points lower than our average during the quarter. We also repositioned our interest rate swap portfolio by terminating $1 billion of swaps that were scheduled to mature in 2026. Half of these swaps hedged our loans, while the other half hedged our AFS securities. In addition, we added $100 million spot starting swap as well as $100 million forward starting swap. As a result of these actions, we finished the quarter with a pay fixed received float interest rate swap portfolio of $1.4 billion with a weighted average fixed rate of 3.56%, down 41 basis points from the linked quarter. $1.1 billion of these swaps are hedging our loan portfolio, while $300 million are hedging our securities.

In addition, we had $600 million of forward starting swaps at a weighted average fixed rate of 3.1% at the end of September. $100 million forward starting — of the forward swaps became active in early October, while the remaining $500 million will become active in 2026.

As a result of the repositioning, our fixed-to-float ratio migrated up from 55% to 57% during the quarter. We are currently forecasting 2 additional 25 basis point rate cuts this year and anticipate that each cut will initially reduce our NII by approximately $300,000, but that the impact will ultimately turn positive after our CD book reprices and result in an estimated positive contribution of $1.6 million to our quarterly NII. Noninterest income increased to $46 million during the quarter compared to $44.8 million in the linked quarter. Noninterest income in the third quarter included a $780,000 charge related to a Visa B conversion ratio change, while the linked quarter included a onetime gain of approximately $800,000 related to a BOLI recovery. Adjusting for these normalizing items, noninterest income increased by $2.8 million, primarily due to higher customer derivative activity, trust and asset management earnings and elevated loan fees.

My expectation is that fourth quarter normalized noninterest income will be between $42 million and $43 million. Noninterest expense was $112.4 million compared to $110.8 million during the prior quarter. Included in noninterest expense this quarter was a severance-related charge of $2.1 million, while the linked quarter included a severance charge of $1.4 million.

Excluding the impact of these items, noninterest expense increased by $900,000 compared to the prior quarter. This change was primarily due to 1 additional payday during the quarter. Compared to my previous forecast, actual normalized noninterest expense was higher than expected due to additional incentives that were recorded during the period. I expect that our fourth quarter normalized noninterest expense to be approximately $109 million. Included within my fourth quarter forecast for both noninterest income and noninterest expense is the impact from the sale of our merchant services business which closed earlier this month. The sale resulted in a gain of approximately $18 million that was substantially offset by a repositioning of our AFS securities portfolio.

The repositioning will increase our quarterly NII by approximately $1.7 million and encompass the sale of $200 million of low-yielding securities that were replaced with new securities at higher current rates. The spread improvement on these newly acquired securities was approximately 335 basis points. The sale of the merchant services business is also expected to decrease our quarterly noninterest income and noninterest expense by approximately $3 million and $2.2 million, respectively.

Combining the impact from the merchant services sale along with the securities repositioning, the total quarterly improvement to pretax earnings will be approximately $1 million or $0.02 additional per share. During the quarter, we also recorded a provision for credit losses of $2.5 million, down from $3.3 million during the linked quarter. Further, we reported a provision for taxes of $14.4 million during the quarter, resulting in an effective tax rate of 21.3%. I expect the tax rate for the full year to be between 21% and 21.5%. Our capital ratios remained above the well-capitalized regulatory thresholds during the quarter with Tier 1 capital and total risk-based capital improving to 14.3% and 15.4%, respectively. And consistent with the linked quarter, we paid dividends of $28 million on our common stock and $5.3 million on our preferreds.

We did not repurchase any common shares during the quarter under our repurchase program. As a reminder, $126 million remains available under the current plan. And finally, our Board declared a dividend of $0.70 per common share that will be paid during the fourth quarter of 2025.

Now I’ll turn the call back over to Peter.

Peter Ho — Chairman & Chief Executive Officer

Thanks, Brad. This concludes our prepared remarks, and we’d be happy to entertain whatever questions you might have.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Matthew Clark with Piper Sandler.

Matthew Clark

I heard the spot rate on CDs at the end of September, but you have the spot rate on total deposits, either interest-bearing or total?

Bradley Satenberg

Total is 154 basis points.

Matthew Clark

And then as maybe for Peter. As we look out on the NIM, when do you think you might be able to get to that that 3% NIM, do you feel — it seems like it may have moved up here a little bit based on a couple of actions you’ve taken this quarter, but just trying to get a sense for some line of sight on when we think we can get there.

Peter Ho

Yes. Yes, that’s kind of the question of the day, isn’t it? So I think what we’ve been fixating on and what investors have been questioning is, can we achieve $250 million by year-end this year. At this point, that seems to be like a reasonably likely potential for Q4. And then as we move into ’26, what we would anticipate — I mean the fixed asset accretion is just going to continue on for a number of years, frankly. And so the way to think about it is, I think, a base layer assuming deposit remix of about what we’ve experienced the past couple of quarters and kind of rates in the yield curve as is that’s about a 25 basis point pickup in NIM per year, so 25 bps.

And then on top of that, as Brad alluded to, there’s opportunity for improvement in the NIM as Fed funds comes down. And frankly, I think we still probably have some opportunity in repricing of the overall deposit book moving forward. So I guess the answer to me is 25 basis points per year and then I think there’s upside in both Fed funds coming down as well as just overall pricing to the overall deposit book.

Matthew Clark

Okay. Great. That’s helpful. And just last 1 for me on the modest loan growth here, a little bit nice little turnaround to the positive. Just any commentary on the pipeline and the outlook for growth here in the fourth quarter and maybe next year, whether or not low single digits is still the right way to think about it?

Peter Ho

Yes. I think low single digits is still the right way to think about it. Our pipelines continue to improve. And Q3 was definitely better than Q2. I think Q4 should be better than Q3, and we’ll just continue to watch the pipelines as we get into the new year. But I think that guidance holds. And I think if we get a little more clarity in the economy, maybe a little bit more stability, some rate reduction, we may see some potential upside there, too.

Operator

Our next question comes from Kelly Motta with KBW.

Kelly Motta

Maybe, Peter, kicking off with some of the changes you made on the wealth side, wondering, was this made last quarter and just kind of how you’re thinking about it seems like a great opportunity to leverage the Bank of Hawaii brand. So wondering how you’re thinking of that progressing? Any efforts to add talent to the bench to help drive that? Just how you’re thinking about it as a lever moving forward.

Peter Ho

Yes. Good question, Kelly. So we actually are in production with Cetera at this point. They’ve been a great partner so far. We are soon to be concluded on both the repapering process. So that’s gone quite smoothly. Obviously, that’s taken some production capability out of the hands of our advisers as they just tender the administrative function there. So I think we’re set to move smartly forward from that point on it. And that opportunity, I think, is a great one, both from the standpoint of providing just a much, much better client experience to our customers, but also in terms of really attracting best in marketplace advisers because I think when you combine the capabilities that we now have with Cetera to our — the brand position the bank enjoys here in the islands, there’s a lot of opportunity in there that we are looking forward to. So that’s kind of half the equation.

The other half of the equation is within our high net worth space. And there really what we’re focused on is really driving a better partnership, if you will, between our commercial bankers and our wealth advisers. We’ve seen some early signs of green shoots there. And then to your question, I think it’s the appropriate one. Against that backdrop, we have been adding a good amount of talent really in the advisory space, and we would intend to see that commitment to talent build continue on in the next year or so, I’d say.

Kelly Motta

Great. Another somewhat high-level question I have here. On Slide 6, that really stands out as how well Bank of Hawaii has been picking up share the past several years. Do you — can you provide any color as to what parts of the business have been driving that? Is that retail? Any specific segments, commercial? Just trying to get a sense of what has been the most impactful in gaining share here on the island?

Peter Ho

Yes. I think that the gratifying part to the question is it’s really been pretty balanced. And so we’ve been able to pick up consumer as well as commercial as well as municipal share over the years. And I really — I don’t think that there’s a single silver bullet here. I think it’s really just our commitment to the marketplace and our consistent application of the strategy that’s been working for us for the past couple of decades now.

Kelly Motta

Got it. Last question from me is just on capital ratios continue to build. It sounds like growth is picking up, but still more in the low single-digit range. Any updated thoughts on buybacks and capital return?

Peter Ho

Yes. I think we are happy with our capital levels. I mean, you can always pick up here or there. But I think given where the stock is at right now, we think that there’s a great opportunity to deploy capital into repurchases at this point. We probably are likely to be doing some of that activity here in this quarter and into next year. Obviously, the dividend is important to us, but we think the payout ratio for now is in pretty good shape. And hopefully, we’ll be able to deploy some of the capital into growth as we move forward.

Operator

Our next question comes from Jeff Rulis with D.A. Davidson.

Jeff Rulis

Circling back to the growth outlook. It sounds like that’s picking up a little bit upward trending. And this Slide 12 sort of outlines some of the de-risking activities or some of the noncore. Has that been a part of the function of some muted growth and maybe ’25 in the rearview and maybe having done some of that, is that helping the net growth equation? Just want to feel at the undertone of derisking is kind of mean you’re always managing credit, but has that been outsized in the trailing months?

Peter Ho

No, Jeff, it’s a good question. I think for the most part, derisking has not been a headwind for us for a while now. I guess the positive to that is I don’t see anything or any activity in our current portfolios that would lead me to believe that it should be — that it’s going to be an impediment to growth moving forward either. So it kind of is what it is for right now. We’re happy with the portfolios.

Jeff Rulis

Got it. Okay. So just kind of pointing out areas that you — that are core and noncore, but from a growth perspective has not been much of a past and future I guess, component. Fair enough. On the — maybe if I hop to expenses. I want to think about — I appreciate the, I guess, the core 109-ish in the fourth quarter. If we rolled out ’26 a lot of discussion of the wealth management investment. You had been in the 2% to 3% growth for ’25. Can we think about that in ’26 at similar levels as wealth maybe put that to the upside of that range or anything else coming on if we can think about ’26 growth rates?

Peter Ho

Yes. Let me point that to Brad Satenberg. Brad.

Bradley Satenberg

Yes. Thanks, Jeff. That’s a good question. I would say if you’re trying to model out, I would expect 2020 expenses to be in the 3%-plus range increase. So — and obviously, there’s a seasonality to it. So I would expect the first quarter to be slightly higher because of the payroll — the seasonal payroll charges that we have. But overall, I think we projected this year 2% to 3%. I think the projection this year is going to be 3% to 4%, but probably closer to like the lower 3s, I think 3.5%.

Operator

Our next question comes from Jared Shaw with Barclays.

Jared David Shaw

On the credit side office, it looked like central business district moved from 17% — or 17% loans from 24%. Was there a payoff there? Or what was driving the reduction in CBD office?

Peter Ho

Yes. We had, what I would say is a relationship SNC credit that was in the office space that we had the opportunity to exit and we chose to exit that facility. It was a reasonable risk, but not core to what we were looking to do in that space, so opportunistic.

Jared David Shaw

Okay. All right. And then does the NII impact from swaps on the side, does that assume the notional swaps remain at the $1.4 billion or does that take into account some of that additional, I guess, it may take into account the additional growth you talked about.

Peter Ho

Can you just repeat your question there? I wasn’t exactly sure what you’re asking.

Jared David Shaw

Sure. Does the impact to net interest income from the swaps that you listed out, does that assume the notional swaps remain at $1.4 billion? Or if not, what are the changes to that?

Bradley Satenberg

Yes. No, we expect it to remain at 1.4%. I mean, obviously, we have our forward starting swaps. So I think I had mentioned in my script, we had $100 million notional swap start in October, and then we’ve got the remaining $500 million that will start in 2026 kind of mid to late 2026. But at this point, all of our expectations are 1.4 notional plus some roll off in 2027 of the 1.4, but also rolling on our forward starting swaps.

Operator

[Operator Instructions] And I’m not showing any further questions at this time. I’d like to turn the call back over to Chang Park for any further remarks.

Chang Park

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 me if you have any additional questions.

Operator

[Operator Closing Remarks]