Bank of Hawaii Q3 2025 Earnings Call - NIM expansion, pristine credit, and wealth push set stage for 2026 upside

Peter Ho, Chairman and CEO, Bank of Hawaii: Good day and thank you for standing by. Welcome to the Bank of Hawaii Corporation Third Quarter 2025 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. To ask a question during the session, you’ll need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. 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, Investor Relations, Bank of Hawaii: Good morning and good afternoon. Thank you for joining us today for our Third Quarter 2025 Earnings Conference Call. Joining me today are 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. 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. I would like to turn the call over to Peter.

Peter Ho, Chairman and CEO, Bank of Hawaii: 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 seven 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. Per the 2025 FDIC summary of deposits released last month, we advanced our number one 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 longstanding core attribute of the 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 the 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 Saterra to help us modernize our broker-dealer platform. Our new platform, named Banco 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 advisors 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 will have further updates for you all as our initiatives in this area season. 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, Bank of Hawaii: 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 longstanding 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.

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 CNI, 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 non-depository financial institutions, NDFIs. The loans fall within our CNI portfolio and equate to only 0.6% of total loans, or $85 million. Of that $85 million, $74 million are to publicly traded equity REITs and just $11 million to private equity.

Not only are the exposures 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 seven basis points annualized, flat to linked quarter, and four basis points lower than a year ago. Non-performing assets were down a basis point from the linked quarter to 12 basis points and two basis points lower than a year ago. Delinquencies ticked lower by four basis points to 29 basis points this quarter and two basis points lower than a year ago. Criticized loans dropped by one basis point to 2.05% of total loans, which is 37 basis points lower than a year ago. 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.

Brad Satenberg, CFO, Bank of Hawaii: 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 to our NII, as well as growth in the average balance of our deposits and the successful repricing of our certificates of deposit 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 three 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 certificates of deposit book will lag our non-maturity deposits. During the quarter, the average cost of our deposits declined by 12 basis points, and I expect that the vast majority of our certificates of deposit will continue to reprice down. During the next three months, over 52% of our certificates of deposit will mature at an average rate of 3.5% and will generally renew into new certificates of deposit at rates ranging from 2.5% to 3%. The spot rate on our certificates of deposit 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 a $100 million spot starting swap, as well as a $100 million forward starting swap. As a result of these actions, we finished the quarter with a pay-fixed, receive-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 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 two 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 one-time 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 the fourth quarter normalized noninterest income will be between $42 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 one 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 pre-tax earnings will be approximately $1 million or two additional cents 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-One Capital and Total Risk-Based Capital improving to 14.3% and 15.4%, respectively. 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. 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 and CEO, Bank of Hawaii: Thanks, Brad. This concludes our prepared remarks. Now, we’d be happy to entertain whatever questions you might have. Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press 11 on your telephone. If your question has been answered and you wish to move yourself from the queue, please press 11 again. We’ll pause for a moment while we compile our Q&A roster. Our first question comes from Matthew Clark with Piper Sandler. Your line is open.

Hey, good morning.

Morning.

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

Total is 154 basis points.

Thank you. As maybe for Peter, as we look out on the NIM, when do you think you might be able to get to 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, just trying to get a sense for some line of sight on when we think we can get there.

Yeah, that’s kind of the question of the day. I think what we’ve been fixating on and what investors have been questioning is, you know, can we achieve $250 by year-end this year? At this point, that seems to be like a reasonably likely potential for Q4. As we move into 2026, what we would anticipate, I mean, the fixed asset accretion is just going to continue on for a number of years, frankly. 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 rate in the yield curve as is, that’s about a 25 basis point pickup in NIM per year, so 25 bps. On top of that, as Brad Satenberg alluded to, there’s opportunity for improvement in the NIM as Fed Funds comes down.

Frankly, I think we still probably have some opportunity in repricing of the overall deposit book moving forward. 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.

Okay. Great. That’s helpful. Just last one from 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? Okay.

Yeah. I think low single digits is still the right way to think about it. Our pipelines continue to improve, and you know 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. 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.

Okay, thank you.

One moment for our next question. Our next question comes from Kelly Motta with Keefe, Bruyette & Woods. Your line is open.

Hey, good morning. Thanks for the question.

Kelly.

Maybe Peter, kicking off with some of the changes you made on the wealth side, wondering was this made last quarter and just how you’re thinking about it. It seems like a great opportunity to leverage the Bank of Hawaii brand. 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. Thank you.

Yeah. Good question, Kelly. We actually are in production with Saterra at this point. They’ve been a great partner so far. We are soon to be concluded on, you know, the repapering process. That’s gone quite smoothly. Obviously, that’s taken some production capability out of the hands of our advisors as they just tend to the administrative function there. I think we’re set to move smartly forward from that point on. 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, you know, best-in-marketplace advisors. I think when you combine the capabilities that we now have with Saterra to our, you know, the brand position that the bank enjoys here in the islands, there’s a lot of opportunity there that we are looking forward to.

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

Great. Thanks for all the color. Another somewhat high-level question I have here. On slide six, what really stands out is how well Bank of Hawaii has been picking up share the past several years. 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.

I think that the gratifying part to the question is it’s really been pretty balanced. We’ve been able to pick up consumer as well as commercial as well as municipal share over the years. I really 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.

Got it. Thanks for the color. Last question from me is just on capital. Ratio has continued to build. It sounds like growth is picking up, but you know still more in the low single-digit range. Any updated thoughts on buybacks when capital return? Thank you.

Yeah. I think we are happy with our capital levels. I mean, you can always pick up here or there. I think, given where the stock’s 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. Hopefully, we’ll be able to deploy some of the capital into growth as we move forward.

Awesome. Thanks for all the time today. I’ll step back.

Thank you. One moment for our next question. Our next question comes from Jeff Rulis with D.A. Davidson. Your line is open.

Thanks. Good morning. Circling back to the growth outlook, sounds like that’s picking up a little bit, upward trending. You slide 12 sort of outlines some of the de-risking activities or some of the non-core. Has that been a part of the function of some muted growth in maybe 2025 or in the rearview? Maybe having done some of that, is that helping the net growth equation? Just want to feel if the undertow of de-risking is kind of, I mean, you’re always managing credit, but has that been outsized in the trailing months?

No, Jeff. It’s a good question. I think for the most part, de-risking has not been a headwind for us for a while now. 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’s going to be an impediment to growth moving forward either. It kind of is what it is for right now. We’re happy with the portfolios.

Got it. Okay. Just kind of pointing out areas that are core and non-core, but from a growth perspective, has not been much of a past and future, I guess, component.

Correct.

Fair enough. Maybe if I hop to expenses, I want to think about, I appreciate the, I guess, the core $109 million-ish in the fourth quarter. If we roll to 2026, a lot of discussion of the wealth management investment. It had been in the 2% to 3% growth for 2025. Can we think about that in 2026 at similar levels as well, maybe put that to the upside of that range? Anything else coming on if we can think about 2026 growth rates?

Let me punt that to Brad Satenberg. Brad.

Brad Satenberg, CFO, Bank of Hawaii: Yeah. Thanks, Jeff. That’s a good question. I would say if you’re trying to model out, I would expect 2026 expenses to be in the 3+% range increase. I would expect the first quarter to be slightly higher because of the seasonal payroll charges that we have. 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%.

Okay, great. Thanks.

Peter Ho, Chairman and CEO, Bank of Hawaii: Yep. Take care. Okay. One moment for our next question. Our next question comes from Jared Shaw with Barclays. Your line is open.

Hey, everybody. Good morning.

Morning.

On the credit side, office, it looked like Central Business District moved from 24% to 17% loans. Was there a payoff there, or what was driving the reduction in CBD office?

Yeah. We had what I would say is a relationship SNCC 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.

Okay. All right. Thanks. Does the NII impact from swaps on the side 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?

Brad Satenberg, CFO, Bank of Hawaii: Can you just repeat your question? I wasn’t exactly sure what you’re asking.

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

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

Okay, thank you.

Peter Ho, Chairman and CEO, Bank of Hawaii: Again, ladies and gentlemen, if you have a question or a comment at this time, please press 11 on your telephone. 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, Investor Relations, Bank of Hawaii: 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. Thank you.

Peter Ho, Chairman and CEO, Bank of Hawaii: Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.