Ladies and gentlemen, thank you for standing by, and welcome to the Bank of Hawaii Corporation First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session after the prepared remarks [Operator Instructions] I would now like to turn the call over to your host, Janelle Higa. You may begin.

Thank you, Kevin, and good morning, good afternoon, everyone. Thank you for joining us today. On the call with me this morning is our Chairman, President and CEO, Peter Ho; our Chief Financial Officer, Dean Shigemura; and our Chief Risk Officer, Mary Sellers. 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 the actual results may differ materially from those projected. During the call, we'll be referencing a slide presentation as well as our earnings release. A copy of the presentation and release are available on our website, boh.com, under Investor Relations. And now, I'd like to turn the call over to Peter Ho.

Thanks, Janelle. Hello, everyone. We appreciate your interest in Bank of Hawaii. First quarter was a good start to 2022 for the organization. As is our custom, I'll share with you some thoughts on the broader market here in the islands. I'll then turn the call over to Dean to talk about the financials and then we'll turn the call over to Mary to give you some perspective on the credit side, and then I'll close with some concluding thoughts, and then we'd be happy to take your questions. So beginning with the economy, things appear to be shaping up, stable, and improving is what I would call it. Here, you see our unemployment numbers, unemployment now down to 4.1%. I think when you look at the forecast numbers out that UHERO has put in there, obviously, I think, clearly, those are due for adjustment, and I think probably impacted by some of the changes of the Bureau of Labor Statistics. So, all in all, I think a pretty good performance unemployment wise. When you look at the -- some of the high-frequency data that the university also puts out what they call their economic pulse, which is an aggregation of a bunch of high-frequency data, you'll see that really that rating is up to its highest level ever in the new environment that we find ourselves in. So as of the past couple of weeks, that ratings hit 81 points to give you some frame of reference, our prior peak was 75 in the summer of 2020 just before Delta hit. And then those numbers took a dip with Delta and then Omicron now. So, nice to be back, up at a high and hopefully moving forward from there. Switching to real estate. Here, you see that the real…

Thank you, Peter. Our strong core loan growth continued in the first quarter. Core loans net of PPP waivers increased by $354 million or 2.9% linked quarter and by $1.1 billion year-over-year or 9.4%. Growth was across both commercial and consumer loan portfolios at 2.5% and 3.2%, respectively, linked quarter. PPP loan balances declined by $69 million and $58 million remained at the end of the quarter. Net interest income in the first quarter was $125.3 million, and included $1.8 million from PPP loans. The fourth quarter net interest income included a one-time reduction of $900,000 for an adjustment to deferred mortgage loan fees and $5.7 million in PPP loan interest income. Adjusting for the one-time charge in the fourth quarter and total PPP loan interest income in both quarters, the first quarter's core net interest income was $123.4 million, up $1.9 million or 1.6% linked quarter, driven by strong loan growth and rising interest rates. Our core net interest margin, which excludes PPP loan interest income, increased by 7 basis points linked quarter to 2.31%. Our loan-to-deposit ratio remains low, well below regional and local peers. This affords us a strong and stable base of low-cost deposits that is a readily available source of liquidity to fund loan growth and provides pricing flexibility. One of the driving factors of this strong deposit base is Hawaii's unique deposit market and our strong position within this market. According to the FDIC deposit study data, the top five banks make up nearly 97% of deposits in the state of Hawaii. Bank of Hawaii is well positioned as the market share leader with exceptional brand recognition and customer relationships. The composition of our deposits further demonstrates the strength of our deposit franchise. 94% of deposits are from core commercial and consumer customers and…

Thank you, Dean. Credit performance remained very strong in the first quarter. Net loan and lease charge-offs were $1.5 million or 5 basis points of average loans and leases annualized. This compared with 2 basis points in the fourth quarter of '21 and 10 basis points in the first quarter of last year. Non-performing assets totaled $20 million or 16 basis points, up 1 basis point for both the linked period and year-over-year. All non-performing assets are secured with real estate with a weighted average loan-to-value of 54%. Loans delinquent 30 days or more remained stable at $28.3 million or 23 basis points while down $11.6 million or 10 basis points year-over-year. And criticized exposure was down to just 1.6% of total loans, driven by continued improvement in the financial performance of those customers who had been most impacted by COVID. The quality of our loan production in the first quarter was strong and reflective of our continued conservative and consistent approach to underwriting. For the quarter, 62% of commercial production was secured with quality real estate modestly leverage. Our commercial mortgage production had a weighted average loan-to-value of 60%, and construction production had a weighted average loan-to-value of 65%. 83% of the quarter's consumer production was secured with real estate, again, conservatively leveraged. Residential mortgage and home equity production had weighted average loan to values and combined weighted average loan-to-values of 62 and 58%, respectively. 79% of home equity production was in first lien. FICO scores for all our consumer production remained very strong and consistent. Importantly, when we look at the bottom quartile of our loan production, we continue to see solid credit metrics. As Dean noted, we recorded a negative provision for credit losses of $5.5 million this quarter. This included a negative provision to the allowance for credit losses of $4.3 million, which was net charge-offs, reduced our allowance to $152 million or 1.21% of total loans and leases or 1.22% net of PPP balances. The decrease in the allowance reflects the improving economic outlook and forecast for our market, coupled with our credit risk profile, while continuing to provide for the uncertainty and potential downside risk associated with recent geopolitical events and tighter monetary policy. The reserve unfunded credit commitments was $5.2 million at the end of the quarter, down $800,000 for the linked period. I'll now turn the call back to Peter.

Thanks, Mary. So to conclude, just a little few thoughts on where we see ourselves moving forward. We believe we are extremely well positioned for what we see as an evolving environment. We're asset sensitive. As Dean mentioned, we operate in an interesting deposit marketplace where the top five local -- locally headquartered players represent 97% of the market. I think equally interesting of that five is that the weighted average loan-to-deposit ratio of those participants is 61%. Bank of Hawaii has a terrific position within this marketplace. From a credit standpoint, we're, as Mary described, in very good position as well. We have a high-quality securities portfolio, and our loan portfolio is well diversified, well balanced and has a 79% collateral position with a weighted average loan-to-value of 56%. 97% of our loans are in markets we've known for decades. And our current strategy ensures has continued familiarity. Finally, from a liquidity standpoint, as Dean mentioned, our deposit base is incredibly core in nature with 94% consumer and commercial and 96% being either demand or savings. As Dean also mentioned, we have historically market-leading deposit betas, which we would anticipate deploying through the cycle. And our operating model generates some of the highest returns of capital in the industry. So now, we're happy to take your questions.

[Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson.

Just a question on the buyback. Just want to check in on the appetite. It was up linked quarter, but it's been higher in the past that just interested AOCI consideration or just general macro, kind of give us an update on where you think on buybacks?

Yes, it is up about $3 million quarter-over-quarter. We continue to implement our capital plan, which generally will full capital for growth and then our dividend. And of course, what's remaining is the available for share repurchases. We continue to believe that's important part of our capital plan. And going forward, I think it will depend on how the environment evolves given the volatility in the rate environment, we'll continue to repurchase shares, but it could change depending on the outlook.

Yes. So, I think our intent is to continue with repurchase probably similar to what you've seen in the most recent quarter. But obviously subject, Jeff, to what's happening in the rate environment you would understand.

Sure. Yes. And Peter, you mentioned it looks like the UHERO forecasts are kind of lagging real time and maybe a question for Mary just on that. Does the first quarter provision recapture sort of baked in as of March end? In other words, if we've seen some economic improvement, can we kind of assume that, that would be reflected in the second quarter provisioning consideration in other words?

Exactly, yes. Exactly.

Okay. Got it. And last one, maybe, Peter, just trying to circle back to the islands behavior on the last up rate cycle, how -- both loans and deposits, you talked about the uniqueness of the local participants on the deposit side. My guess is, last upgrade cycle, deposit betas were lower. But if you could just touch on both how loan pricing -- loan and deposit pricing kind of played out in the last cycle?

Yes. I would say that the deposit front was pretty stable. I mean, I think we had about a 20% deposit beta, and we didn't have the best betas in the marketplace. So, there's a good amount of stability, I'd say, on the deposit front in part -- and the reason -- one of the reasons why I mentioned the loan to deposit -- the weighted loan-to-deposit ratio for the top five is there's always been a bit of a mismatch between funding and assets in the islands. And I think that's in part how you get those betas, right? So as we look forward, Jeff, Interestingly, the liquidity dynamics of the marketplace are not a lot different than the last cycle. So then therefore, I wouldn't anticipate much to change on the deposit front. On the loan front, like I said, it's always been a funding heavy asset lighter environment. There's always going to be competition there. But with rates rising, that will be kind of interesting to see kind of where people position because it's really the yield or the income side has really been very volume driven to-date through the past, call it, 10 years -- 5 to 10 years. But as margins are picking up, I think maybe people will be more sanguine just to kind of pick up on the rate side versus the volume side. We'll see though.

Our next question comes from Andrew Liesch with Piper Sandler.

Just questions on the loan growth continues to be really strong, it sounds like you retained more on the mortgage side that may have driven that. But is there anything you can point to what's going on in your market or maybe at your -- with your bankers and lenders specifically that's driving this? Just given how strong that it has been for several quarters now.

Yes, sure. So well, first of all, we saw growth in just about every category, both consumer and commercial, C&I was a bit flattish. But CRE was up 3.4%, construction was up 12.7%. So clearly, on the commercial side, I think we're the beneficiary of a healing economy, increased activity as people are generally a lot better capitalized and you might imagine coming out of a pandemic. And then having a consistency of team for many, many years that just allowed us to, one, ensure that we've got quality staff out there in the marketplace, taking care of clients; and then two, having staff that's been managing the same clients for an awful long time. And so as opportunity begins to peak its head out, execution becomes that much more possible. On the consumer side, yes, I think we probably held on to a little bit more resi mortgage production just as kind of -- I think the fee side was not quite as attractive as earlier quarters. But in general, I'd say, that resi was up, home equity was up, indirect was up even indirect with the inventory challenges of the marketplace. And there, it's a combination of, I think, really great programming. We're really starting to see traction on our marketing front. We're seeing great traction on our channel diversification side, good movement into our SimpliFi online platform. So really kind of a combination of things that's helped to deliver that outcome, Andrew.

That's great color. And then how are pipelines shaping up so far this quarter? I know it's still early, but how are things trending now?

Yes. I mean we have a monthly pipeline meeting with the entire consumer and commercial team. It's always much anticipated. And I'd say Q2 looks pretty good. Again, I mean, you never know. I mean, it's a pretty volatile geopolitical environment we find ourselves in. But for now, we're feeling pretty good about growth. I don't know if we're going to get 2.9% core because that's pretty -- that's getting pretty frothy. But I think solid loan growth is definitely built into the pipeline as it stands right now.

Next question comes from Ebrahim Poonawala with Bank of America.

I guess maybe one first on expenses. I think Dean mentioned full year $414 million or $415 million, that's about 6% to 7% up year-over-year. Just talk to us, Peter, as we look forward beyond this year, around the puts and takes, I mean, it feels like inflationary pressure will be higher relative to what we saw post financial crisis that's going to have some upward push to the expenses. Give us a sense of where you're investing, where the bank is it from an investment spend perspective and areas of incremental cost savings to offset the growth?

Yes. So yes, that's really the question these days isn't it? The -- maybe take a slightly higher lens view of the situation. We're -- in the last five years, if you look at our expense trend, our investment expenditures have grown by about 11%, just over 11% annually. So, obviously, a big investment in the categories like technology or data analytics or marketing or e-commerce and those types of things. The overall growth of expenses in the Company has been 3%. And so kind of those non-strategic areas, those areas other than what we deem to be investment in strategic, has grown at 0.9% clip. So, we've been able to accommodate the investments that we think we need to do. Clearly, the world is changing and clearly, consumers are changing. And who's paid for that is, in fact, kind of every other expenditure. So as we move forward, the challenge is, we do see a more inflationary environment. Obviously, I don't think we can keep kind of other expenses kind of the rest of the Company at 1%, call it, that's got to go up. But I think what will happen to, Ebrahim, is clearly that 11% was not an intended sustainable CAGR. I mean that number is going to come down meaningfully. And so, I think what we're going to land out is kind of a 4%-ish kind of annual growth rate. That, as you know, for Bank of Hawaii is a little bit on the high end. But I think we're just in a different inflationary environment than we have been previously. And there's still some investment spend to be made, but I'll tell you, a good portion of that is already built into our expense bloodstream. And so a lot of the kind of pre-work that you got to do to get these platforms, whether it's marketing or e-commerce going, it takes a lot of upfront expense.

Got it. So like a four percentage core expense growth is the right way to think about that? So that was helpful, thanks, Peter.

Yes.

And on -- and I think you mentioned, Dean, about 5 to 6 basis points per quarter for the rest of the year. And you have provided some color on just deposit dynamics. But -- anything on the deposit front, like as you think about as maybe some of the non-core competitors get more competitive on pricing, do you see any subset of your deposit balances leaving the bank, which inherently might be more rate sensitive, so maybe either going to money markets or market-related kind of funds where they can get a higher rate?

That's certainly a possibility and something that we continue to look at. But we are -- we do have -- as we manage our deposit base plans for alternatives also, we do have a pretty significant trust area that can help us there. But the intent is to kind of maintain our customer base and deposit balances.

Got it. And just one last question. When we look at the tangible, the TCE to TA ratio, I think you mentioned you're still going to do some modest buyback similar to 1Q levels. And I realized the EOCA impact is transitory. But when we look at the TCE at 5.4, does that have any impact in terms of influencing capital management? Or you look past AOCI as near-term noise?

It's certainly something that we pay attention to. It's not maybe the highest ratio that we look at. We look at primarily the regulatory capital ratios. And from that perspective, the AOCI doesn't impact that. So that's kind of what we look at. If there's a significant change, there could be some different actions. But right now, it's certainly just a regulatory capital ratios that are top of mind.

Next question comes from Kelly Motta with KBW.

The first is just on your new core NIM guidance of 5 to 6 basis points a quarter. Just wanted a quick clarification if that was incorporating the forward curve or any rate assumptions going into that?

It's not the entire curve. It's certainly expecting rates to rise. But it's slightly -- actually less than the forward curves would predict currently. And it assumes about a 2.5% Fed funds rate and 2.85 on the 10-year.

Great. And then turning to loan growth, I mean across the board, it was really, really strong. It does look like core C&I came down a little bit. Just wondering, if you could provide us an update on utilization rates and where they are versus where they've been historically and what -- when and if you think they are going to start normalizing?

They were 34% this quarter. That was down from 37% last quarter. They tend to range around probably 33 to 40 really just episodically as customers look to access liquidity.

Yes. I don't think that utilization rates are kind of -- I don't think they represent either an upside or downside risk to outstanding. So, it's kind of pretty normal at this point.

Our next question comes from Laurie Hunsicker with Compass Point.

Just wondered, if we could go back to net interest income for a moment. I just wanted to understand with respect to the PPP fees, so there was $1.8 million this quarter that leaves you around number of $600,000. Is that a right number? Or have I -- is there a better number?

It's actually about $800 million remaining on the Company's...

$800 million.

Yes.

Great. Okay. And you probably expect most of that to occur in the June quarter? Or how are you thinking about that?

I would say, it's becoming less and less of a material part of our balance sheet and income statement. But I would say, roughly half of that would run off in the second quarter. And maybe -- and then another half of what's remaining in the third and -- so, we'll probably have some stragglers throughout the year, but kind of it's stepped down enough where it's not a meaningful part of our balance sheet.

Okay. Great. And then I think in Kelly and Ebrahim, you touched on this with their questions. But wondering if you could sort of help us think about it a little bit more succinctly in terms of your deposits are fabulous and they're low costing and they were. If we rewind back to 2019, I think your deposit betas will be fabulous as well. Can you just help us think a little bit about for every 25 basis points, what that looks like? Maybe just drill it down a little bit more since your forward guide is looking less than the forward curve? Can you just help us think about it a little bit more because a 5 to 6 basis points per quarter increase, at least by my math, is looking really pretty light? I'm just trying to understand that because you are so asset-sensitive?

So, every 25 basis point increase in Fed funds is about $900,000 per core, so about $300,000 per month. And that's only on the Fed front, the short end of the curve. If the curve -- the long end were to go up 25, it's a little bit more nuanced, but it's about $40,000 per month, but it compounds because it's just -- that's how the nature of the longer-term assets as they reprice.

The other factor, Laurie, to think about too is, as rates were coming down, our bias was to invest a little bit longer in the securities portfolio. And now with kind of an inversion in that trend, we're probably going to be investing shorter and even maybe towards floaters in that environment. So, it's going to give us a lower initial yield, but hopefully, a higher yield down the path.

Okay. Great. That's helpful. And then with the non-interest income, I just wanted to understand two things. I think you had mentioned that included in your securities loss was a one-time negative adjustment for the Visa Class B conversion? Did I get that right, $400,000

Yes.

Okay. And can you just expand on that a little bit more?

Yes. So when we sold our Visa Class B shares, we took back a swap on the conversion ratio. So Visa reset that ratio. And as part of the trades that we did, the reset cost to us was $400,000. So it's a one-time reset. And then going forward, we have that about $1.2 million per quarter.

Okay. Perfect. And then...

That was why there's a bump in that line.

Right. It makes a lot of sense. Okay. And then can you also talk a little bit about within your non-interest income. If you could just remind us where you are on NSF fee and overdraft fees? And where you were specifically for this quarter? And how you're thinking about it? What your plans are to become a little bit more consumer friendly and any impact that we would see on fee income?

So what are the numbers for the quarter?

Yes. For the quarter, in total, it's about $4 million, of which $3 million is OD fees and $1 million is NSF fees.

Yes. We're -- obviously, that's a very topical discussion right now, Laurie. And I would say, we're looking at our practices. One thing I would note, and I think most -- this is true for most of the banks in this marketplace. We don't charge an account level fee on our accounts. So basically, they're fee-free. So, I think that's a little bit different than some of the larger banks out there and something we're thinking through consideration wise. And so, we're looking at both OD as well as NSF. Maybe NSF in particular, nothing kind of decided at this point. But I guess the last thing I would say is, our practices have evolved pretty dramatically over the past several years really and always in the direction of being more supportive to our client base. And I think we're going to continue to evolve in that direction, but clearly, there's just a lot of activity around that space right now. We're aware of that.

Okay. That's helpful. Okay. And then last question. Mary, this one is for you. And I love your loan production quality side. I think it's great, and I appreciate all the credit detail. So, yes, your reserves to loans ex-PPP at 1.22, it looks like there's still a chunk of COVID question. Can you help us think about where that reserve to loan line may go in terms of us thinking about a normalized loan loss provision?

I would expect it to move back to where we were at day one pre-COVID, which was really at about 99 basis points in total coverage.

Our next question comes from Kelly Motta with KBW.

I just wanted to ask, Dean, quickly on the tax rate is 23% still a good rate to use for the full year?

Yes, 23% is still a good rate for the full year.

And I'm not showing any further questions at this time. I'd like to turn the call back over to our host for any closing remarks.

I'd like to thank everyone for joining us today and for your continued interest in Bank of Hawaii. Please feel free to contact me, if you have any additional questions or need further clarifications on any of the topics discussed today. Thank you so much, everyone.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.