Bank of Hawaii Corp (BOH) 2025 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Bank of Hawaii Corporation fourth-quarter 2025 earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded.

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

Good morning, and good afternoon. Thank you for joining us today for our fourth-quarter 2025 earnings 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 our 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.

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 in the fourth quarter. Fully diluted earnings per share was $1.39 per share, 63% higher than results from a year ago and 16% higher than last quarter.

Net interest margin improved for the seventh straight quarter, up 15 basis points to 2.61%. Return on common equity improved to 15%. Loans and deposits both grew modestly in the quarter. Importantly, noninterest-bearing demand deposits grew 6.6% on a linked basis. Credit quality remained and remains pristine.

I'll now touch on some operating highlights. Brad Shairson will briefly update you on credit quality, and Brad Satenberg, will dive a little deeper into the financials.

As you know, Bank of Hawaii has a unique business model that creates superior risk-adjusted returns by leveraging our unique core Hawaii market, our dominant brand and market position, and our Fortress risk profile. Our market-leading brand position is largely the driver of our market share outperformance, giving us both a robust and durable competitive franchise advantage. Our brand advantage is built on our 125-plus year history in the islands, our physical branch system and increasingly, our digital service, marketing, and commerce capabilities. Over the past 20 years, Bank of Hawaii has delivered market share growth nearly 4 times greater than that of our next closest competitors.

The market share growth continued in 2025, advancing another 40 basis points. We are the clear deposit market share leader in Hawaii. Interest-bearing deposit costs improved by 20 basis points, and total cost of funds improved points 16 basis points in the quarter. Also in the quarter, we remixed $659 million in fixed rate loans and investments from a roll-off rate of 4% and into a roll-on rate of 5.8%, helping to improve net interest margin.

As I mentioned, Q4 was the seventh consecutive quarter of NIM expansion. In early 2025, we had a goal of achieving a 2.50% NIM by year-end based on fixed asset repricing, improving deposit remix, and rate cuts. We were gratified to see NIM result for Q4 well exceeding that goal. We believe NIM by the end of 2026 could come in near the 2.90% range.

Our Fortress credit position is a longstanding strength of Bank of Hawaii. The portfolio is diversified by product type, predominantly secured and possessing superior long-term loss experience. We dynamically manage our credit portfolio, actively managing off loan categories that we find not to meet our stringent loss standards.

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

Thanks, Peter. I'll begin with an overview of our credit portfolio and conclude with asset quality metrics. And as you will see, our performance has remained strong, consistent with prior quarters.

Turning to our lending philosophy. The Bank of Hawaii is dedicated to serving our local communities lending primarily within our core markets where our expertise allows us to make informed and disciplined credit decisions. Our portfolio is built on long-tenured relationships with approximately 60% of both our commercial and consumer clients having been with the bank for more than 10 years.

Geographically, our loan book has concentrated in markets we know well. Approximately 93% of loans are based in Hawaii with 4% in the Western Pacific and just 3% on the Mainland, primarily supporting existing clients who operate both locally and on the Mainland. Our loan portfolio remains well balanced between consumer and commercial exposure. Consumer loans represent 57% of total loans or approximately $8 billion.

Within the consumer portfolio, 86% and consists of residential mortgage and home equity loans with a weighted average LTV of 48% and weighted average FICO score of 799. The remaining 14% of consumer loans are comprised of auto and personal lending. Credit quality in these segments also remained strong with average FICO scores of 730 for auto loans and 761 for personal loans.

Turning to commercial lending. The portfolio totaled $6.1 billion, representing 43% of total loans, 73% is secured by real estate with a weighted average LTV of 54%, reflecting our ongoing emphasis on collateral protection. CRE remains the largest component of the commercial book totaling $4.2 billion or 30% of total loans. And in Oahu, the state's largest CRE market, a combination of consistently low vacancy rates and flat inventory levels continue to support a stable real estate market. Across industrial, office, retail, and multifamily property types, vacancy rates remain below or close to their 10-year averages.

Total office space on Oahu has declined by approximately 10% over the past decade, driven primarily by conversions to multifamily residential and lodging. This structural reduction in supply combined with the return to office trend has brought vacancy rates closer to long-term averages and well below national levels.

Our CRE portfolio remains well diversified with no single property type exceeding 8.5% of total loans. Conservative underwriting practices continue to be applied consistently, with weighted average LTVs below 60% across all CRE categories. In addition, diversification within each segment remains strong, supported by modest average loan sizes. Scheduled maturities are also well balanced with more than 60% of CRE loans maturing in 2030 or later, reducing near-term refinancing risk.

Looking at the distribution of LTVs, there isn't much tail risk in our CRE portfolio, only 1.6% of CRE loans have greater than 80% LTV. C&I accounts for 11% of total loans. This portfolio is diversified across industries characterized by modest average loan sizes with very little leveraged lending.

Turning to asset quality. Credit metrics continued to perform exceptionally well. Net charge-offs totaled $4.1 million or 12 basis points annualized, that's up 5 basis points from linked quarter and 2 basis points higher year-over-year. Nonperforming assets declined to 10 basis points, down 2 basis points from linked quarter and 4 basis points year-over-year. Delinquencies increased to 36 basis points, that's up 7 basis points from linked quarter and up 2 basis points year-over-year. And criticized loans increased to 2.12% of total loans, up 7 basis points from linked quarter and 2 basis points higher year-over-year. Notably, 86% of criticized assets are real estate secured with a weighted average LTV of 54%.

And as an update on the allowance for credit losses on loans and leases, the ACL ended the quarter at $146.8 million, that's down $2 million from the linked quarter. The ratio of our ACL to outstandings dropped 2 basis points to 1.04%.

I will now turn the call over to Brad Satenberg for a discussion of our financial performance.

Thanks, Brad. For the quarter, we reported a net income of $60.9 million and a diluted EPS of $1.39, an increase of $7.6 million and $0.19 per share compared to the linked quarter. These increases were primarily due to the continued expansion of our net interest income and our net interest margin. As Peter mentioned, this is the seventh consecutive quarter that we've expanded both our NII and NIM, and this quarter's expansion of $8.7 million and 15 basis points represents the most significant improvement during that stretch.

Driving this expansion is the successful repricing of our deposits, a $200 million securities repositioning that we executed in early October as well as the deposit mix shift which is a positive $100 million this quarter. This is the first time since the second quarter of 2022 after the Fed started raising rates that the mix shift had a positive impact on our earnings. As a reminder, the mix shift represents deposits shifting from noninterest-bearing and low-yielding deposits to higher cost deposits. The mix shift peaked at $967 million in the second quarter of 2023 and has moderated since then.

During the year, the average quarterly mix shift was $25 million compared to $340 million in 2024. During the quarter, the yield on interest-earning assets declined modestly by 1 basis point as floating rate assets repriced down in response to rate cuts during the latter half of the year. The impact of these rate cuts was almost entirely offset by the positive impact from our fixed asset repricing.

While the yield on interest earning assets dipped modestly, the cost of our interest-bearing liabilities improved by 19 basis points or 9% compared to the linked quarter and was driven by the successful repricing of our deposits which declined to 1.43%, a 16-basis-point reduction from the third quarter. In addition, our deposit beta improved from 28% to 31%, and I remain optimistic that we will ultimately achieve a beta at least 35% after Fed funds hit its terminal rate.

It's also important to point out that we ended the quarter with a spot rate on our deposits of 1.3%, or 13 basis points lower than our average cost during the quarter. Based on the spot rate, I anticipate another solid improvement in the cost of our deposits during the first quarter.

Additionally, our CD book continues to reprice down. And during the fourth quarter, the average cost of our CDs declined by 22 basis points to 3.18%. During the next three months, 52% of our CDs will mature at an average rate of 3.1%. The majority of these CDs are expected to renew into new CDs at rates ranging from 2.25% to 3%.

We made no changes to our interest rate swap portfolio during the quarter, and we finished the year with an active pay fixed received flow portfolio of $1.5 billion at a weighted average fixed rate of 3.5%. $1.1 billion of these swaps are hedging our loan portfolio, while $400 million are hedging our securities. In addition, we have $500 million of forward starting swaps at a weighted average fixed rate of 3.1%. $300 million of these forward swaps will become active during the first half of 2026 while the remaining $200 million will become effective during the third quarter.

At the end of the year, our fixed float ratio remained stable at 57%, and I believe that we are well positioned for any interest rate environment. Noninterest income was $44.3 million during the quarter compared to $46 million during the linked quarter. As I discussed last quarter, noninterest income in the fourth quarter was impacted by an $18.1 million gain on the sale of our Merchant Services portfolio which was largely offset by a $16.8 million loss incurred in connection with the repositioning of our investment portfolio. The current quarter also includes a $770,000 charge related to a Visa B conversion ratio change while the linked quarter includes a similar Visa B charge.

The third quarter also includes approximately $3 million of Merchant Services fee income that will not recur following the sale of that business. Adjusting for these normalizing items, noninterest income was essentially flat. My expectation is the first quarter normalized noninterest income will be between $42 million and $43 million.

Noninterest expense was $109.5 million compared to $112.4 million during the linked quarter. Included in noninterest expense this quarter is a $1.4 million reduction in our FDIC special assessment as well as a nonrecurring $1.1 million donation to our Bank of Hawaii Foundation. The linked quarter includes a severance charge of $2.1 million and approximately $2.2 million of nonrecurring Merchant Services expenses.

Compared to my previous forecast, actual normalized noninterest expense was higher than expected mainly due to additional incentives that were recorded during the period. For 2026, I am forecasting that expenses will increase by between 3% and 3.5% from our 2025 normalized expenses. And I anticipate that our first quarter normalized noninterest expense will be approximately $113 million. The first quarter generally tends to be elevated as compared to the rest of the year due to seasonal payroll taxes and incentive-related charges.

During the quarter, we also recorded a provision for credit losses of $2.5 million, which is unchanged from the linked quarter and resulted in a coverage ratio of 1.04%. Further, we reported a provision for taxes of $17 million during the quarter, resulting in an effective tax rate of 21.5%. I anticipate that our tax rate will be closer to 23% in 2026 due to the impact from forecasted discrete items.

Our capital ratios remained above the well-capitalized regulatory thresholds during the quarter with Tier 1 capital and total risk-based capital improving to 14.5% and 15.5%, respectively. And consistent with the linked quarter, we paid dividends of $28 million on our common stock and $5.3 million on our preferreds. Plus, we resumed our stock repurchase program in the fourth quarter and purchased approximately $5 million of common shares at an average price of $65 per share. I'm currently planning to increase the level of our repurchases next quarter. At the end of the year, $121 million remained available under the current plan.

Finally, our Board declared a dividend of $0.70 per common share that will be paid during the first quarter.

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

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

(Operator Instructions) Matthew Clark, Piper Sandler.

I just want to start on the noninterest-bearing deposit growth this quarter. Good to see some strength there. It sounds like less mix shift, people seeking higher rate, probably some seasonality too. But just -- can you just drill down on that -- those balances there at the end of the year, whether or not that's sticky and what your outlook is for growth this year?

Yeah. Matt, I think the fourth quarter might be a bit outsized. I mean, it was a 6% pickup in NIBD. But I think directionally, we've seen growth in that category for a few quarters now, and that's coming from a pretty balanced grouping of business segments participating. So commercial, our consumer folks are doing a good job bringing in sticky, low-cost deposits.

So we would anticipate this probably continuing would be my sense, but probably not at that same clip of 6%-plus but probably a little bit overstated. And I think there's probably some seasonality in there, as you alluded to.

Okay. Great. And then on the loan side, pretty much in line. Anything you're seeing there in the pipeline that would suggest -- I know, you ideally like to get back to mid-single digits. I don't know if that's realistic this year or not, but just want to get a sense for the pipeline and your outlook there, too.

I'll let Jim cover that, too.

Yeah. I feel generally better about where our pipelines are at. But until we can get both consumer and commercial kind of both contributing to growth, I think we'd probably stick in the low-single-digits at this point. But I think there's opportunity to improve as we work throughout the year.

Yeah. But I think to be clear, the '25 was basically -- it was a flat year from an end-of-period standpoint year-on-year. So I think that '26, at least from our forward vision into at least the first quarter, feels like it's going to be more of a kind of a mid-single-digit type of year for us. So a bit of an improvement, but still, we still love to see growth accelerate there obviously.

Okay. Great. And then just last one for me. Do you happen to have the -- your special mention in classified balances at the end of the year?

I will take a look and see if I can get that for you. I don't have that off hand.

We'll come back to you in a minute or so, Matt.

Jeff Rulis, D.A. Davidson.

A couple of questions on the margin. I just want to confirm that kind of update on the margin to reach near the 2.90% range. That's kind of end of year, not a fourth quarter average of 2.90%. Is that correct?

That's the way we're thinking about it, Jeff. That's right.

Okay. Okay. And do you happen to have the December margin average?

Yes. We finished the year at 2.67%. So about 6 basis points above where we finished the fourth quarter end.

Great. And just on the sensitivity, it seems like that margin has been almost absent Fed hasn't really impacted, it's kind of a mechanical increase. Would you say the same sensitivities or lack thereof. It's a pretty -- from your seat, looks like a pretty extended increase, I guess, regardless of rate moves upcoming?

Yeah, I would agree with that. I mean I would say that any rate cuts that we see as long as they're orderly and sort of telegraphed, I think we'll see a benefit from that. And then also, you look at the mix shift. And to the extent that we can keep that either moderated at breakeven or even positive. So I think that will actually contribute to margin as well.

Yes. Let me just add a little bit to that, Jeff. I think what you saw in the quarter was the convergence of a number of things that we're supportive of the margin expansion. Obviously, as you pointed to the fixed asset repricing is mechanical. I mean, we just have assets coming on at lower yields and they're going back on to, which is a good thing obviously.

But rate cuts did have a positive impact for us to the extent we get rate cuts moving forward. We think that's going to continue to be a positive for us.

And then also in the quarter, we had very strong -- as you know, we had strong deposit remix characteristics. So we're able to grow out the lower-yielding NIBD in particular deposits. And if that continues to persist, that will be another tailwind for us.

And then finally, I'd say that I think that, yes, certainly, effectively there have been two rate cut periods, '24 and '25. I'd say that our ability to manage deposit pricing with the '25 vintage was materially better than '24. So I think the team has gotten better at managing a little more of a rate reduction cycle, and that's coming through on our betas.

Got it. Nice backdrop. If I could squeeze one more in. Just on the credit side with the ACL declined linked quarter, I don't want to read too much into it, but is there any sort of indication of a mix change or macro improvement, you kind of outlined the CRE firming up, but I just want to touch on credit. And then potentially, that reserve release, if we should take anything from that.

Sure. So I will answer your other question as well related to special mentions. Special mention, I will start off with that and just say that special mention, the end of the fourth quarter was $63.4 million, that's actually a year-over-year change down $46.8 million from the fourth quarter 2024. And then our total classified at $298.5 million.

And, as Peter mentioned earlier, credit quality remains pristine. During the quarter, I will mention that we had a charge-off of just over $1 million related to a previously identified nonperforming asset, and as a result, you can see our NPAs declined while net charge-offs experienced a modest uptick. This was obviously idiosyncratic resolution rather than a sort of reflection of a broader credits trust. That's very clear. Absent this charge-off, our credit quality metrics would have been pretty much very similar to the last quarter's performance.

We do continue to see very strong underlying portfolio performance overall, and we have stable trends across delinquencies, criticized assets, and any early-stage indicators. And in addition, to answer your second question, the most recent UHERO economic forecast for the State of Hawaii reflects an improved outlook for 2026, and that's really what supports that reduction in the ACL coverage during the quarter. So we feel really good about how we're positioned right now.

Well, an improved outlook coming off what would previously have been a forecasted downturn.

Exactly.

So they revised their downturn numbers up.

That's right.

Yeah.

Jared Shaw, Barclays.

Hey, maybe just sticking back with the growth in DDA. That's a great quarter. Can you just give a little color on market share gain that you think from that versus just sort of improving customer backdrop? And then if we look at the slide that shows the strength of sort of the market share gain over the last year and the last 20 years, is there a natural ceiling for that? Or do you think that Bank of Hawaii can continue to sort of take significant share here?

I'll address the second part of the question first. I like to believe that our historic performance is an indicator of what's possible for the future. We think of Hawaii as our core and primary market, and we're always trying to figure out ways to serve our clients better, whether it's on the consumer side or the commercial side. That's been met with pretty handsome market share pickups. And I just -- I don't really see a condition that would lead me to believe that, that's going to retard at all often in the future.

I mean, it's a competitive world, things are changing, products change, consumer demand and sentiment changes. And to date, we've been pretty good at understanding how that plays through here in this marketplace. And I'd hope that continues to continue on.

As relating to the demand deposits growth over the past -- certainly this quarter and the past couple of quarters prior, I think it's -- this market feels like it's stable but not growing tremendously. So I don't know that a lot of our operating deposits have come from just better economic outcome. That feels reasonably flat to me. I do think there's some cyclicality into the fourth quarter.

And I think, frankly, it takes a while for the teams to really focus in on whatever categories you're incenting them to focus in on. And DDAs -- and deposits and DDAs in particular, is an area that we have obviously put a lot of emphasis into as Fed funds have given that a good amount of profitability. I think we're beginning to see kind of the fruits of our labor there.

Okay. I appreciate that color. I guess shifting maybe to the other side of the balance sheet, talking about the low single-digit loan growth opportunity. Could you just give a little color on what you're seeing in terms of commercial pipelines and what sort of the backdrop on the residential mortgage side could look like?

Sure. Jim, do you want to cover that?

Yeah. So maybe I'll start with commercial. We've seen the pipeline build nicely through Q4. I think that sets us up really in a more positive fashion in Q1. The activity has been on the commercial real estate side in our large commercial real estate business, but we've also seen some good growth in the pipeline in our middle market businesses. So I think it's more robust than just one area, and we feel pretty good about that.

On the resi side, we had a really solid Q4. That was driven in part by an increase in overall purchase activity, aided by a couple of projects that closed out during the quarter. Pipeline remains pretty good going into Q1. And so I think, as I said earlier, I think we feel better about overall loan activity. And I think we see the opportunity to move into the mid-single digits as we work through the year.

Andrew Terrell, Stephens.

If I could just start on the margin. Obviously, another -- it sounds like another year of a really good margin expansion. I'm just curious, is that mostly fixed asset repricing driven? Do you assume or contemplate any securities restructuring within there? And then as we look out beyond just the fourth quarter or year-end of 2026, does the fixed asset repricing benefit continue in 2027 or start to diminish somewhat?

I'll let Brad touch on that (inaudible) but I'll let Brad --

Yeah. I mean, just to start with the fixed asset repricing, we believe we've got a couple of years at least of that. I mean, we think we'll still see an impact of it. It may start to diminish slowly, but we'll continue to see that continue to have an impact over the next couple of years easily.

As far as this quarter, I mean, we did have fixed asset repricing and the securities repositioning, obviously, had an impact and then the rate cuts obviously had an impact as well on the decrease in our cost of deposits. And so looking into the first quarter, I mean, I think we're continuing that momentum. I think you'll see the NIM expand, maybe not to the same extent as you saw in the fourth quarter, but I still think we'll see a nice expansion with the spot rates on our cost of deposits and the December NIM going into January at 2.67%. I think we'll continue to see some good momentum with our NIM.

Yeah. Okay. And then just on the topic, do you have the total NII impact of the swaps in the fourth quarter, inclusive of the terminated hedges, I think you guys terminated last quarter?

The impact on our net interest income. It was about just over $1 million for the quarter. And that includes the impact of the amortization of the termination costs.

Got it. Okay. And then last one for me, just it sounds like interested in picking up the buyback a bit here in the first quarter, but growth also sounds a little stronger as well on the loan side. Just remind us what you're comfortable at from a capital standpoint. And then just on the repurchase front, should we expect that becomes a more consistent part of the capital return story moving forward?

I think as long as growth remains kind of in the tepid range, call it, we're going to be looking to deploy capital into buybacks. We like kind of where the price is from a purchase standpoint at least. So we were $5 million last quarter. I would anticipate that we'll be closer to the $15 million to $20 million range moving forward per quarter.

Great. Nice quarter.

(Operator Instructions) Kelly Motta, KBW.

Most of mine had been asked and answered at this point, but one area I did want to touch on was fees. You mentioned on your October earnings call about the potential opportunity in wealth and ahead. And I appreciate the Q1 guidance of $42 million to $43 million. As you look ahead, can you perhaps share a bit about the opportunity on the fee side and kind of the cadence of the potential pull-through with that?

Sure. Jim you want to touch on that?

Yeah, sure, Peter. So as we've mentioned, we've spent the last couple of years really building into our wealth opportunity. We've started to see some good traction internally, educational wise, participation wise, calling wise with our clients. We're doing a number of different engagement activities with clients just from a seminar type of perspective. And I think those things are really starting to help us to build the overall momentum.

You can look at quarter-over-quarter, we had a little over 2% growth in fees on a linked-quarter basis. And so I think that production in Q4 was one of our highest levels in a while. Pipeline remains very strong from an investment perspective. So I think as we move forward, getting into that 10% range, I think that was the guidance that we provided at the last call, even higher as we have more time to build into the opportunity, I think we feel pretty reasonable about that.

Got it. That's really helpful. And then on the expenses, just a minor housekeeping question. On the 3% to 3.5% increase. I just want to make sure I'm using the right normalized expense base, have you at about $441 million in 2025?

Is that the right number to kind of build off of, given that there's been a couple of one-time items, especially here in the second half?

Kelly, this is Brad. Yes, that's about right. I mean, I look at it as somewhere between $440 million and $441 million.

Got it.

There are no further questions at this time. I would like to turn it back to Chang Park for closing remarks.

Thank you, everyone, for joining our call today, and thank you 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 so much.

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