Bank of Hawaii Corporation Aktie

Aloha, and welcome to the Annual Meeting of Stockholders of Bank of Hawaii Corporation. Please note that today's meeting is being recorded, and the recording will be made available after the meeting on the company's website. During the meeting, we'll have a question-and-answer session. You can submit questions or comments at any time by clicking on the Q&A icon.

It is now my pleasure to turn today the meeting over to Raymond Vara, Bank of Hawaii Corporation Board Chair. Mr. Vara, the floor is yours.

Good morning. I'm Raymond Vara, Board Chair, and on behalf of our Board of Directors and management, I welcome you to the 54th Annual Meeting of the Shareholders and our 7th Virtual Shareholders' Meeting. It is now 8:30 a.m., and in accordance with the notice of meeting, I will call the meeting to order.

Now I'd like to introduce the Board of Directors of the Bank of Hawaii Corporation who are all in attendance by phone. First, John Erickson, Joshua Feldman, Michelle Hulst; Kent Lucien, Elliot Mills, Alicia Moy, Victor Nichols, Dana Tokioka; Suzanne Vares-Lum; Robert Wo, and James Polk, our President and CEO.

Now I'd like to introduce the rest of our management team, beginning with our Vice Chairs, Marco Abbruzzese, Matthew Emerson, Patrick McGuirk, Bradley Satenberg, and Bradley Shairson. And our Senior Executive Vice President, Guy Churchill, Sharlene Ginoza-Lee, Jill Higa, Jennifer Lam, Christine Stevens, Dana Takushi, Luke Yeh and Dirk Yoshizawa. I'd also like to introduce David Howell, representing Ernst & Young, our independent public accounting firm.

You will see the agenda on the meeting website as well as a link to the rules of conduct for the meeting. We appreciate your cooperation and abiding by the meeting rules. As a reminder, shareholders attending the virtual meeting can vote their shares online from now through the closing of the polls by clicking the Vote icon on your screen. If you have previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed and no further action is required.

During the business portion of the meeting, we will consider the following 3 proposals: the election of the company's directors; the advisory vote to approve compensation for the named executive officers; and the ratification to reappoint Ernst & Young to serve as the company's independent registered public accounting firm for 2026. We will follow the formal business with our company report and current state of business. Following our report, you'll have the opportunity to ask some questions. We ask the shareholders who wish to address the meeting do so at that time.

Now let's proceed with the meeting. Board of Directors fixed February 27, 2026, as the record date for determining the shares of common stock entitled to vote at this meeting. The company's Corporate Secretary has advised me that the meeting was called and proper notice was given to all shareholders of record. A copy of the notice of annual meeting and the affidavit of mailing are on file.

The number of shares represented in person or by proxy is 33,428,960 or 84% of the 39,725,521 shares issued and outstanding as of the record date. I hereby declare that a quorum is present, and we are qualified to act on all matters set forth in the notice of the meeting. Most of you who returned your proxies authorized the persons named in the proxy to vote on all proposals coming before the meeting. We will now act on the recommendations of the Board of Directors relating to the proposals listed in the proxy statement.

The first proposal is the election of 12 directors. The 12 nominees will serve a 1-year term. They are as follows: John Erickson, Joshua Feldman, Michelle Hulst, Kent Lucien, Elliot Mills, Alicia Moy, Victor Nichols, James Polk, Dana Tokioka; myself, Raymond Vara, Suzanne Vares-Lum and Robert Wo. As no other persons have been nominated in accordance with the company's governing documents, the nominations are now closed.

The second proposal is to approve, on an advisory basis, the compensation of the named executive officers disclosed in this year's proxy statement.

The final order of business is to ratify the reappointment of Ernst & Young as the company's independent registered public accounting firm for fiscal year 2026.

Before I report the preliminary vote results for these 3 proposals, as everyone who wanted to vote cast their vote.

[Voting]

It seems that all of those desiring to vote have voted. I therefore declare the voting polls closed.

I've been advised by our inspectors of election that in accordance with the proxies received from our shareholders, each of the director nominees received a substantial majority of the votes cast at least 27,956,448 votes in favor or 95% of the votes cast.

With respect to proposal #2 related to the advisory vote on executive compensation, approximately 17,274,193 shares voted in favor or 59% of votes cast.

With respect to proposal 3 related to ratifying Ernst & Young as the company's 2026 independent registered public accounting firm, approximately 32,239,430 votes voted in favor or 96% of votes cast.

Since we have received more than a majority in favor of each nominee and each proposal, I am, therefore, pleased to announce that all 12 of the company's directors have been elected for a 1-year term, and the 2 remaining proposals have been approved as the Board recommended.

Final results of the voting will be published in our Form 8-K and filed with the Securities and Exchange Commission. There being no further business to come before the meeting. This concludes the official business portion of the meeting. The 2026 Bank of Hawaii Corporation Annual Meeting is now adjourned.

We will now go to the Q&A session. But before we do that, our President and CEO, Jim Polk, will share some highlights from the year.

Thank you, Ray. Before I provide some company highlights from 2025, I must first pause to recognize the recent retirement of Bank of Hawaii's long-time Chairman and CEO, Peter Ho. Peter served an extraordinary 16 years as our Chairman and CEO, and we've all benefited from his steady thoughtful leadership. On a personal level, I'm deeply grateful for his mentorship and support over the course of my career. And as an organization, we all thank him for his leadership and service to the bank, our employees and our community.

I begin my tenure as CEO and a director with a deep sense of gratitude and responsibility to this organization and the communities we serve. I'm optimistic about the future because we start from a position of such strength, a market-leading brand, a strong financial foundation and a team that is exceptionally well positioned to achieve great results for all of our stakeholders.

Included on our team is Brad Satenberg, who has promoted to Vice Chair and Chief Financial Officer in July 2025, replacing Dean Shigemura, who retired after a distinguished career with the company that spanned 3 decades. Brad joined us in July of 2024, and was Dean's Deputy for a year before taking over the CFO role, and I'm happy to say that the transition has gone off without a hitch.

I'll now share a few other reflections from 2025 and then open it up for a question-and-answer session. Bank of Hawaii closed 2025 with solid financial performance that grew our market-leading share of deposits while maintaining a strong balance sheet, disciplined expense management and an ongoing commitment to long-term growth.

Diluted earnings per common share were $4.63 for the full year with net income of $206 million. Our assets finished the year at $24.2 billion, and we saw consistent growth in net interest income and margin in every quarter of 2025. Total deposits and total loans ended the year at $21.2 billion and $14.1 billion, respectively, both up from the prior year.

Asset quality and liquidity continued to remain strong, and we maintained our long unbroken streak of returning capital to our shareholders by continuing our dividend at $0.70 per share per quarter throughout 2025, and we also repurchased 5 million shares of stock in the fourth quarter of 2025. Our strong financial performance reflects the hard work and exceptional commitment of our employees whose dedication continues to drive our success.

In 2025, we strengthened relationships and deepened ties to the communities we serve by building or renovating 5 branches, including a new branch in Lahaina to replace the 1 that was destroyed in the 2023 Maui wildfires and we opened our new West Pacific regional headquarters into Tamuning, Guam.

Continuing our long-standing tradition of innovation, we introduced generative artificial intelligence tools to enhance operational efficiency, customer service and employee experience in 2025.

Bank of Hawaii can only be as successful as the communities we serve. And in 2025, we continued to help create a better future for our island communities by providing lessons and financial literacy to school children mentoring small business owners and improving the environment with hands-on volunteerism by our Bankoh Blue Crew. In 2025, our employee-led Live Kokua Giving Campaign raised $623,000 for worthy local causes and our Bank of Hawaii Foundation supported the important work of more than 47 local nonprofits.

As we close the books on 2025 and look ahead, I'd say we're off to a great start for 2026, and I remain confident that our strong financial performance positive outlook and unwavering dedication to our shareholders, customers, employees and community positions Bank of Hawaii well for continued success. And now I'd be happy to take your questions.

Okay. It looks like we have no questions. So I'd like to close out by thanking you for your interest in Bank of Hawaii. Have a great rest of the day and a great weekend, Mahalo.

This concludes the meeting. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Bank of Hawaii Corporation First Quarter 2026 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 speaker today, Chang Park, Executive Vice President, Investor Relations.

Please go ahead.

Good morning and good afternoon. Thank you for joining us today for our first quarter 2026 earnings conference call. Joining me today is our President and CEO, 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 Jim.

Thanks, Chang. Good morning, and good afternoon, everyone. Thank you for joining us today. Before I get into the quarter, as this is my first earnings call as CEO, I want to say a few words about my predecessor, Peter Ho. Peter built something truly special here, a franchise defined by discipline, consistency and a genuine commitment to the people of our island communities. With 16 years as CEO, he left this institution much stronger in every way that matters. I'm grateful for his confidence in me, and I'm honored to carry this forward.

Now on to the quarter. Bank of Hawaii delivered another solid set of results to open 2026. Net interest income and our net interest margin expanded for the eighth consecutive quarter, driven by continued fixed asset repricing and a meaningful decline in total deposit costs. NIM increased 13 basis points as our fixed asset repricing engine continues to perform as expected. During the quarter, we remixed $643 million in fixed rate loans and investments from a roll-off yield of approximately 4% to a roll-on yield of 5.6%, continuing to lift the overall yield on earning assets.

We remain on track toward our stated goal of approaching 2.9% NIM by the end of the year, and we feel good about that trajectory even against an uncertain rate backdrop. Deposit trends continue to be encouraging as our average cost of total deposits declined 17 basis points, achieving a beta of 36%. Normalizing for nonrecurring expenses and noninterest income, our EPS came in at $1.39, reflecting the steady underlying earnings power of the franchise. We maintained strong capital and excellent credit quality while continuing to build on our leading deposit market share position here in Hawaii.

The strategic formula has not changed. Bank of Hawaii operates in one of the most distinctive banking markets in the country, concentrated and relationship-driven where four locally headquartered banks hold more than 90% of FDIC reported deposits. In that environment, brand and trust are our structural advantages. They allow us to price deposits attractively, manage funding costs actively and generate superior risk-adjusted returns across cycles.

Turning to our home market. Hawaii's economy entered 2026 on solid footing, near record low unemployment, strong visitor spending and an active construction pipeline anchored by significant military and public infrastructure investment. That said, we are watching the environment carefully. Tensions in the Middle East, rising energy costs and the potential for sustained inflation are headwinds that could affect consumer confidence and travel demand as the year progresses.

Our credit portfolio continues to reflect the underwriting discipline this bank has maintained through many cycles. I want to briefly address the recent Kona Low storm in Hawaii and Typhoon Sinlaku in the West Pacific. First and foremost, Bank of Hawaii remains focused on supporting our employees, customers and communities impacted by these events. We are in the early stages of assessing the potential impact of Typhoon Sinlaku, and it will take several weeks to gain clearer insight. Brad Shairson will cover the potential impact of the Kona Low storm as well as our overall credit profile in more detail shortly.

I also want to highlight the progress we are making in wealth management, an area I expect will become an increasingly important part of the franchise's story. Through Bankoh Advisors and our partnership with Cetera, we continue to expand investment capabilities for our retail and private banking clients.

Simultaneously, we are deepening coordination between our commercial and private banking teams around our high net worth client relationships. Importantly, we recently opened the Center for Family Business and Entrepreneurs, where we provide dedicated planning resources to Hawaii's family-owned businesses, encompassing financial and estate planning, succession planning, business valuation and M&A advisory capabilities. For many of these families whose wealth is largely concentrated in their company, these are among the most consequential decisions they will face. It is a capability uniquely suited to Bank of Hawaii's depth of relationships and trusted role in this market.

I'll close with this. We remain focused on the strategy, the culture and the values that have made Bank of Hawaii successful. I fully intend to carry forward the intensity of execution, the continued investment in our people and technology and an unwavering commitment to the island communities that have trusted this institution for 128 years. I'm proud to be in this role, and I look forward to the work ahead.

With that, I'll turn the call over to Brad Shairson to discuss credit, after which Brad Satenberg will walk through the financials in detail. We'll then be pleased to take your questions.

Thanks, Jim. 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 is 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 56% of total loans or approximately $8 billion. Within the consumer portfolio, 86% consists of residential mortgage and home equity loans with a weighted average LTV of 48% and weighted average FICO score of 798. 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 729 for auto loans and 760 for personal loans.

Turning to commercial lending. The portfolio totals $6.2 billion, representing 44% of total loans. 73% is secured by real estate with a weighted average LTV of 55%. This reflects our ongoing emphasis on collateral protection. CRE remains the largest component of the commercial book, totaling $4.3 billion or 31% of total loans. And in Oahu, the state's largest CRE market, a combination of consistently low vacancy rates and flat inventory levels continues 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 9% 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 any near-term refinancing risk.

Looking at the distribution of LTVs, there isn't much tail risk in our CRE portfolio. Less than 3% of CRE loans have greater than 80% LTV. C&I accounts for 11% of total loans totaling $1.6 billion. This portfolio is diversified across industries characterized by modest average loan sizes, and there is very little leveraged lending. Turning to asset quality. Credit metrics continue to perform exceptionally well. Net charge-offs totaled $1.1 million or just 3 basis points annualized, down 9 basis points from linked quarter and 10 basis points lower year-over-year. 3 basis points is abnormally low. This was driven by a small net recovery in commercial as well as a slight decline in consumer net charge-offs.

Nonperforming assets declined to 9 basis points, down 1 basis point from linked quarter and 3 basis points year-over-year. Delinquencies increased to 40 basis points, up 4 basis points from linked quarter and up 10 basis points year-over-year. And criticized loans remained flat to the linked quarter at 2.12% of total loans, that's up 4 basis points year-over-year. Notably, 84% of criticized assets are real estate secured with a weighted average LTV of 53%. And as an update on the allowance for credit losses on loans and leases, the ACL ended the quarter at $147 million, up $200,000 from linked quarter. The ratio of our ACL to outstandings remained flat at 1.04%. This ACL coverage does include a $3.2 million qualitative overlay specifically related to the recent Kona Low storm. This overlay accounts for the potential impact of flood damage to approximately 15 to 20 properties in our portfolio, net of anticipated insurance recoveries.

We are monitoring these exposures closely but can already see that the potential loss would not deviate greatly from the amount we have reserved. And in light of recent industry discussions around private credit, I want to provide clear assurance that we don't lend to private credit funds or providers. Our exposure to nonbank financial intermediaries is negligible, totaling about $80 million or 0.6% of total loans, with the vast majority of this tied to diversified publicly traded equity REITs.

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

Thanks, Brad. For the quarter, we reported net income of $57.4 million and a diluted EPS of $1.30, decreases of $3.5 million and $0.09 per share as compared to the linked quarter. These declines were primarily the result of elevated noninterest expense as compared to the fourth quarter. Q1 included the annual bump in seasonal payroll taxes and benefits as well as a nonrecurring compensation-related charge incurred in connection with the accelerated vesting of restricted stock awards under the retirement provision of the company's share-based compensation plan. As it relates to NII and NIM, we continue to see a positive expanding trend in both. This is the second quarter in a row that we achieved a double-digit increase in NIM with a 13 basis point pickup this quarter and an aggregate 28 basis points over the past 6 months. And despite two fewer days this quarter, NII grew by $5.6 million.

Consistent with the previous quarter, NII and NIM benefited from the combination of our fixed asset repricing, the continued repricing of our deposits following the Fed rate cuts as well as the deposit mix shift, which was a positive $94 million this quarter. Compared to the linked quarter, average noninterest-bearing deposits were up by $84 million. During the quarter, the yield on our interest-earning assets declined by 4 basis points as the effect of the rate cuts at the end of last year were fully recognized during the current quarter. This impact was partially offset by our fixed asset repricing, which contributed $2.6 million to our NII. Our cost of interest-bearing liabilities improved by 21 basis points during the quarter as our deposits continue to reprice down following the rate cuts. The cost of deposits declined to 1.26%, representing a 17 basis point reduction as compared to the linked quarter.

The spot rate on our deposits was 1.25% at the end of Q1. And as Jim mentioned in his comments, our deposit beta improved to 36%, which exceeds our prior target of 35%. While I still anticipate that we will see some modest improvements in our cost of deposits going forward, any material changes will likely be contingent upon future Fed rate adjustments. At the moment, we are currently forecasting no rate cuts in 2026. Contributing to our declining deposit costs was the continued repricing of our CD book. During the quarter, the average cost of CDs declined by 29 basis points to 2.89%. And at the end of the quarter, the spot rate -- the spot CD rate was 2.8%. Over 50% of our CDs will mature within the next three months at an average rate of 2.91%.

The majority of these CDs are expected to renew at rates ranging from 2.25% to 3%. During the quarter, we terminated $400 million of our active swaps, and we finished the quarter with an active pay fixed received float portfolio of $1.2 billion at a weighted average fixed rate of 3.3% and an average life of 1.5 years. $900 million of these swaps are hedging our loan portfolio, while $300 million are hedging our securities. In addition, we have $400 million of forward starting swaps with a weighted average fixed rate of 3.1% and an average life of 2.4 years. $200 million of these forward swaps became active at the beginning of April, while the remaining $200 million will become effective during the third quarter.

We finished the quarter with a fixed to float ratio of 59%, which keeps us well positioned for any changes in the rate environment. Noninterest income was $41.3 million during the quarter compared to $44.3 million during the linked quarter. This quarter includes a $200,000 charge related to a [ Visa B ] conversion ratio change, while the fourth quarter included a similar [ Visa B ] charge of $770,000 as well as a $1.3 million net gain in connection with the combined impact from our merchant services portfolio sale and an AFS securities repositioning during the quarter. Adjusting for these normalizing items, noninterest income was down $2.3 million. This decline was primarily caused by lower loan and deposit fee income as well as a dip in earnings within our Wealth Management division due to less than favorable market conditions.

My expectation is that the second quarter noninterest income will be approximately $42 million. Noninterest expense was $116.1 million compared to $109.5 million during the linked quarter. The first quarter tends to be the highest expense quarter of the year. And as discussed earlier, this quarter included a seasonal payroll tax and benefit charge of $2.8 million and a nonrecurring charge related to the accelerated vesting of restricted stock awards of $3.5 million. In addition, the quarter also contained an unrelated severance charge of $750,000. The linked quarter had a $1.4 million reduction in our FDIC special assessment and a nonrecurring $1.1 million donation for our Bank of Hawaii Foundation. Compared to my previous forecast, reported normalized noninterest expense was lower than expected, mainly due to a reduction in our quarterly FDIC insurance assessment.

Going forward, I expect that this assessment will be approximately $3.2 million or $0.5 million less per quarter than our recent run rate. As a result, I'm lowering my forecasted range for annual growth in overhead expenses to between 2.5% and 3% or 0.5% lower than my previous forecast. Second quarter normalized noninterest expense is expected to be approximately $112 million. As a reminder, the second quarter expense will include the annual merit increases of approximately $1.2 million per quarter. During the quarter, we also recorded a provision for credit losses of $1.8 million, resulting in an unchanged coverage ratio of 1.04%. Further, we reported a provision for taxes of $17.1 million during the quarter, resulting in an effective tax rate of 22.9%.

Our capital ratios remained above the well-capitalized regulatory thresholds during the quarter with Tier 1 capital and total risk-based capital of 14.4% 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. During the quarter, we repurchased approximately $15 million of common shares at an average price of $77 per share. I am currently planning to repurchase an additional $15 million to $20 million of stock during the second quarter. And at the end of the first quarter, $106 million remained available under our current repurchase plan. Finally, our Board declared a dividend of $0.70 per common share that will be paid during the second quarter.

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

Thanks, Brad. We'd now be happy to answer any questions that you may have.

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

Maybe just on that last expense mention, I just want to catch that real quick. The expense guide, does that include the stock expense and severance? I mean, are you carving that out for this? Or is that included in the full year growth expectation?

That's inclusive of that. So we're saying $112 million, all inclusive of every expense that we're aware of today.

Got it. Okay. And then I guess on the -- maybe just a broader growth question. It looks like the consumer book has been either growth or more moderate runoff. I guess, looking forward, that's kind of been the area that maybe hasn't been adding to net production. Are you any closer with comfort there of that sort of flattening out that maybe you look at your full year growth numbers, possibly some upside to kind of the low single-digit guide or still waiting to see more confidence before inching that up?

Yes. Jeff, this is Jim. The way I look at it is resi has been coming along okay. We've had -- it was a good quarter for resi in Q4. It was a decent quarter in Q1, just given that it was all purchase activity. And we see some continued strength in the resi side going forward. I think our challenge has really been on the home equity line and the indirect books. So we've got a number of different initiatives we're pursuing in both of those in an attempt to kind of stabilize those books. I think the reality is, and you hit it on the head in the last part of your comment, I think we need a little bit more certainty in the overall environment. A little bit of rate relief would be helpful. I'm not sure we'll get that.

So in the meantime, with respect to home equity line, we've got a number of different direct mailing activities that we're doing, looking at some special programs to try and retain some of the balances that are coming off of, say, fixed rates. And then in the indirect space, we've implemented digital contracting, and we're trying to speed up funding time frame. So we're hoping that those can sort of give us a little boost on that side. But I think until we get better clarity in the overall environment, we're still -- from a loan perspective, still in that low single-digit growth outlook.

And if I could squeeze just one last one on the capital side. I appreciate the guide on the buyback for the second quarter. It seems like pretty steady activity. I guess as earnings continues to ramp here and the dividend payout, I guess, could potentially dip below 50%. Is there -- just revisiting the dividend side and your conversations with the Board, is that something you look at in terms of the overall might want to inch that up as you've kind of broken out on earnings over the last few quarters?

It's certainly something that we talk about, but it's not something that we're considering at the moment. I think we're comfortable with where our dividend is today. Anything that we're returning back to shareholders beyond that probably would come through the buyback.

Our next question comes from the line of Andrew Terrell with Stephens.

I wanted to ask on the -- thank you for the CD color, the time deposit color you gave. I think you said [ 2.80 ] on the spot cost in the period. Do you have the comparable figure for either total deposit costs or interest-bearing deposit costs? And then I wanted to get a sense on -- it sounds like there's still a pretty decent opportunity to reprice some of the time deposit portfolio over the balance of the year. I was hoping you could just talk to kind of the competitive landscape for deposits you're seeing in the market right now.

Yes. I mean our total deposit cost was 2.89% for the quarter. The spot rate, again, as you mentioned, was 2.8%. The competitive landscape is, it's reasonable and it's rational, and we still think there's an opportunity to continue to reprice our CD book. So the majority of our CDs are in our 3-month portfolio or a portion of our portfolio, and we think the majority of that will continue to roll off and reprice into and renew into new 3-month CDs. And probably, again, at rates between 2.25% to 3%, depending on which CD they go into. But I still think there's an opportunity there, and I think we'll continue to see benefits from that CD repricing.

Yes. Okay. And I was hoping just to ask on the wealth management. Maybe just refresh us on kind of where you're at in terms of efforts there? And is it something we should expect -- I know you gave the fee income guide kind of for the second quarter. Just how should we think about growth potential in the wealth business and then overall fees throughout the year?

Yes. I think there's two components to it, right? The early one that we'll begin to see some benefit from is really coming from the Bankoh Advisors side, our former broker-dealer. As you may recall, we spent most of the fourth quarter repapering that business. So activity was pretty low. January, we came out of that. We began to see some early positive results in February and March. So I think we can continue to see that rise as we work through the end of the year.

On the broader wealth management effort, that's really a longer-term sort of effort for us, right? We're spending a lot of time building out the infrastructure and the capability set, really introducing the concept of business planning and family dynamics planning, succession planning to our client base and spending a lot of time internally just educating folks and bringing people together to build momentum. We've clearly seen great activity around that. We've got a lot of growth in the valuations pipeline and some M&A activity, I think that we'll see earlier returns on. But the bigger effort, you're probably not going to see meaningful results until we get into 2027 would be my look.

Our next question comes from the line of Kelly Motta with KBW.

Maybe I would like to circle back to the question of capital. Clearly, you guys are incrementally repurchasing shares and have given color around that. Just wondering if you guys have looked at the proposed capital changes and given your higher percentage of resi, if you guys have done any sensitivity around that and if -- how that, if relevant, would change potentially your capital outlook?

Maybe I'll start and then Brad can clean up. I think we're comfortable with the way we're look -- to Brad's earlier comment, the way we're looking at dividends, the way we're looking at stock buybacks. We have started to look at the potential impacts of the proposed regulatory changes. We have such a weighting towards risk-weighted assets already. There'll be some favorable movements in it. But I still think it's early, and I think we're really still trying to assess how that would change our posture on what we do with our capital.

Yes, I would just add to that. I mean, obviously, it's just a proposal right now. It's not final, but we have done some early assessments of the impact, and it will be positive for us. I mean, I anticipate that our regulatory capital ratios will see a 50 to 100 basis point improvement based on the way the current proposal is structured.

That's really helpful. I appreciate the color. I would like to also circle back to the question of margin. You guys reiterated that [ 2.90% ] outlook to exit the year. You had a fantastic first quarter for NIM expansion. And I'm just wondering, as you look ahead, clearly, there's a lot of variables here in terms of the margin, but it seems like the asset repricing story continues. Wondering if you have -- could provide any commentary or color as to how you guys are thinking about the normalized margin as well as kind of the cadence from here and it would seem to imply somewhat of a slowing versus 1Q. So how we should be thinking about the inputs here?

Yes. So again, maybe I'll start and then Brad can clean up whatever. The fixed asset repricing, I think we've shared this before, it basically adds about 5 basis points a quarter, 20 basis points a year. So as we close out this year heading towards that [ 2.90% ] number, we can see -- if the question is really around terminal NIM, we can see that in the 3.25% to 3.50% range based on no rate cuts and just kind of the current outlook that we have. There's upside to that if we do see rate cuts, but we feel confident that, that fixed asset pricing engine is pretty mechanical at that 20 basis points a year, given a 10-year sort of in the 4.25% range.

Our next question comes from the line of Jared Shaw with Barclays.

I guess maybe just looking at some of the tourism trends, are you seeing any impact on the outlook there just given the sort of the pace of tech layoffs and some of the layoffs that we're seeing on the West Coast? Or is it still sort of marching steadily forward?

Yes. I think it's probably too early to tell. I mean the reality is we started off the year on really strong footings. Visitor counts were relatively flat, but spending was strong relative to previous years, really driven by West and East Coast travelers. I think we're going to really need to see a little more data coming out. March will probably be a little messy just because we have the Kona Low storm. So I'm not sure that will be a clear print. But what we've become more and more aware of is that the market is really sort of being driven by that K-shaped sort of consumer and that top end consumer, which is why we continue to see the spend increase.

So I think we're optimistic that, that trend will continue through the year. But as we all know, there's lots of noise out there. So we continue to monitor sort of the length of the conflict on Iran, what that ultimately means for energy prices, how that translates into airfares and its ultimate impact on tourism. So I think for right now, I think the outlook would be stable, and then we'll get a better sense as some of those other items become more clear.

Okay. And then on the expense side, I guess, sort of two parts. One, when we look at that growth guide for the year, is there any assumption that there's some build-out in the wealth management side in that number? And if not, is that something that longer term, we think we should be building in? And I guess the second part, how are you looking at AI investments? And is there opportunity on the tech side at all to maybe make some investments in the near term that could generate some positive operating leverage going forward?

Yes. So maybe to the first question, I think the guidance is reasonable guidance based on our current outlook in the wealth management space. As we get further out, you can probably begin to think about greater growth on the fee side. I think previously, we sort of talked about wealth management being in the $60 million annual fee range and the potential to get into double-digit growth on that particular line item or a particular fee item. So that's kind of how I look at that.

The AI side, we've spent a lot of time building out our governance, excuse me, and our risk management practices. We have a number of different AI cases that we're working on right now to implement some related to the wealth management and the discovery process opportunities within the call center and a number of others, really with the goal of getting right to your point, how do we create more operating leverage in the organization by creating efficiencies across the company. Still a little early to read on that one, but that's our focus, and we're big believers that it has the opportunity to have a meaningful impact on the expense side.

Our next question comes from the line of Matthew Clark with Piper Sandler.

I wanted to circle back to the loan growth commentary. I think in the prior quarter, there was some optimism around approaching mid-single-digit loan growth as we march through the year, if not achieve mid-single-digit loan growth for the year. But I wanted to double check whether or not that low single-digit growth expectation was just for the consumer book? Or was that for the overall portfolio?

It was for the overall portfolio. I think that guidance was given before we started the situation in Iran, which created a lot greater uncertainty. I think we're really comfortable in that low to mid-single-digit number. I think we're going to need a little more certainty in the environment before we can get comfortable guiding up to the mid-single-digit place -- space, excuse me.

Okay. And then how about the loan pipeline coming out of the quarter relative to year-end?

The loan pipe has on both the consumer, at least the resi side and on the commercial side have remained strong. They're solid. I think we saw the benefits of that on the commercial side in Q1. And I was reasonably pleased in a purchase-only environment or without any projects in Q1 that resi did what it did. We have some projects that will be closing out in Q2, which will aid on the resi side. And commercial, I doubt we'll be able to repeat the strong quarter that we had in Q1, but I'm still optimistic that we'll see growth to keep us in line with the guide that we shared.

Okay. And then on the deposit side, your NIB on average was up in the quarter in the period, though, NIB and overall deposits down about 4% annualized. In the last year's first quarter, you showed some good growth, but then the year prior, you saw kind of a similar decline. So just wanted to get a sense for the -- anything unusual in the quarter? Would you chalk it up to seasonality? Or was there something else going on that we should think about?

Yes. There's probably a couple of things in Q1. Well, maybe I'll back up a bit. We had a really strong deposit quarter in Q3 -- or excuse me, Q4 and a really strong deposit quarter in Q1. If you just go back and look at where we were relative to, say, [ 9/30 ] on both the average and the spot, particularly on the NIB, we're still up like 5%. So we feel pretty good where we're at even at the close of the quarter. There was a couple of things within Q1 that occurred to bring the deposits down. One was we opted out of some high-cost public monies that just we didn't see the need to pay for that, and we let that run off, and that was a pretty meaningful number.

And then we had some escrow monies related to some projects that closed out during the quarter that brought NIBD down. We still feel good about where we're at. I think just noting how strong Q4 and Q1 have been, we're probably looking at more flat as we get into Q2 on both the top end and we've talked about in the past low single digits -- excuse me, low-yield deposits, NIBD. So I think overall, we feel good. I think Q2 is typically a seasonally low period for us. So we think given how we've grown, if we can maintain a flat top line and a flat NIBD, it will be a good quarter for us.

We have a follow-up question from the line of Andrew Terrell with Stephens.

I just want to go back to the commentary on the margin. You talked about structural kind of longer term, 3.25% to 3.50% on the margin. Can you just remind us, is that kind of in the current rate environment? Do you feel like rate cuts would help on that? And can you provide just a better sense of time frame to get back to that level?

Well, so if we're at roughly, say, [ 2.90% ] at the end of this year, and we're growing on the fixed asset repricing at 20 basis points per year. That would put us sort of in that zone at the end of 2028. We get some rate cuts as you've been able to see in both Q4 and Q1. If we get rate cuts, we're really able to capitalize on. So that would accelerate the time frame around that.

This concludes the question-and-answer session. I would now like to hand the call back over to Chang Park for closing remarks.

Thank you, everyone, for joining us today and 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.

This concludes today's conference. Thank you for your participation. You may now disconnect.

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 advise 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 4x 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 long-standing 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% 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 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 of 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 3 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] Our first question comes from the line of Matthew Clark of 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 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?

Yes. 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 percent, 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'd 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, Jim?

Yes. 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 mid-single -- in the low single digits at this point. But I think there's opportunity to improve as we work throughout the year.

Yes. 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 to look and see if I can get that for you. I don't have that off hand.

Might come back to you in a minute or so on that.

And our next question comes from the line of Jeff Rulis of 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?

Yes, 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, 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. And I will answer your other question as well related to special mention. Special mention, I'll start off with that and just say that special mention at 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 credit stress. That's very clear. Absent this charge-off, our credit quality metrics would have been pretty much very similar to 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 of what would previously been a forecasted downturn.

Exactly.

So they revised their downturn numbers up.

That's right, yes.

Our next question comes from the line of Jared Shaw of Barclays.

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?

Yes. 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.

And our next question comes from the line of Andrew Terrell of 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 -- but I'll let Brad want to.

Yes. 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.

Yes. 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.

[Operator Instructions] And our next question comes from the line of Kelly Motta of KBW.

Most of mine have 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 on 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?

Yes, 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, I 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 onetime 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.

I'm showing 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.

Good day, and thank you for standing by. Welcome to the Bank of Hawaii Corporation Third Quarter 2021 Earnings Conference Call. [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.

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.

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?

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.

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.

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

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

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?

Total is 154 basis points.

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.

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.

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?

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.

Our next question comes from Kelly Motta with KBW.

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.

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.

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?

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.

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?

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.

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

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?

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.

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?

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

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 percent 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%.

Our next question comes from Jared Shaw with Barclays.

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?

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.

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.

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

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?

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 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.

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.

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

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

Good morning and good afternoon. Thank you for joining us today for our second 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 today 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 will turn the call over to Peter.

Thanks, Chang, and good morning or good afternoon, everyone. Thanks for your interest in Bank of Hawaii. The second quarter of 2025 was another solid quarter for the bank. Earnings per share advanced for the fourth consecutive quarter. Net interest income and net interest margin expanded for the fifth consecutive quarter as our margin reversion continues towards more historical levels. Expenses were well controlled. Credit remains pristine. Capital advanced to 14.2% on a Tier 1 basis, while ROCE at 12.5%.

I'll begin by quickly reviewing our core and long-standing operating strategy and then touch on conditions in our core Hawaii market. I'll then kick it over to Brad Shairson to discuss our credit profile, and then Brad Satenberg will expand a bit on the financials and this is his first earnings call as officially our new CFO.

As I think most of you know, Bank of Hawaii has a unique business model. Fundamentally, we lean into a unique marketplace in which 4 locally headquartered banks hold more than 90% of the market's FDIC reported deposits. We've built a fortress market position by leveraging a best-in-market brand position, which enables us to deposit price attractively. This cost advantage has historically allowed us to generate strong returns on a superior risk-adjusted basis.

We've been successful on both a short- and long-term basis, methodically building market share. For several quarters now, we've been successful in stemming deposit remix from lower or no-yield deposits to higher-yielding deposits while holding overall deposit levels relatively stable. This has helped us bring down both our cost of interest-bearing deposits and total cost of deposits.

Concurrently, our fixed assets have been remixing into higher-yielding earning assets. In the quarter, $572 million in fixed/variable assets cash flowed off at a roll-off rate of 4% and into a roll-on rate of 6.3%. It is this slowing of deposit remix matched with the continued yield accretion in the fixed asset cash flow that has largely enabled us to drive up both net interest margin and net interest income for 5 quarters now. Assuming rates hold, we would anticipate that this trend will continue approaching more historic NIM levels, albeit with substantially higher earning asset levels than previously.

Switching to local market conditions. Here, you can see that the employment picture in Hawaii continues to outperform the broader U.S. economy. The visitor industry remains solid with visitor expenditures up 6.5% year-to-date and arrivals up 2.8% through May. This growth is being driven by the U.S. continental market, both East and West and offset partially by lower international performance out of Japan and Canada. RevPAR continues to perform consistently. Residential real estate in the islands remains stable with single-family home prices rising modestly, while condo prices were off 0.5% year-to-date.

And now let me turn the call over to Brad Shairson to talk about credit. Brad?

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 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 second 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 56% 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 800. The remaining 14% of consumer consists of auto and personal loans, where our average FICO scores are 731 and 760, respectively.

Moving on to commercial. Our portfolio size is $6.1 billion or 44% of total loans. 72% 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 or lodging. This long-term trend of office space reduction, along with the return to office movement has brought the vacancy rate almost back 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%. Overall, it's a granular portfolio with 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 1.3% of CRE loans have greater than an 80% LTV.

Turning to C&I, which comprises 11% of our total loans, you will notice that the book is extremely well diversified across industries with modest average loan sizes. Additionally, only a small portion of these loans are leveraged.

Turning to asset quality. Credit metrics remain stable and the portfolio continues to perform well. Net charge-offs were just $2.6 million at 7 basis points annualized, down 6 basis points from linked quarter and 3 basis points lower than a year ago. Nonperforming assets were up 1 basis point from the linked quarter to 13 basis points and just 2 basis points higher than a year ago. Delinquencies ticked up by 3 basis points to 33 basis points this quarter and just 4 basis points higher than a year ago, and criticized loans dropped by 2 basis points to 2.06% of total loans, which is 17 basis points lower than a year ago. And the vast majority, 78% of those criticized assets are real estate secured with a weighted average LTV of 54%.

As an update on the allowance for credit losses on loans and leases, the ACL ended the quarter at $148.5 million, up $800,000 from linked quarter. The ratio of our ACL to outstandings ticked up 1 basis point to 1.06%.

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

Thanks, Brad. And before I jump into our financial results for the quarter, I'd like to take a moment to recognize my predecessor, Dean Shigemura, and thank him for his outstanding leadership, mentorship and invaluable contributions to the bank over the past 26 years. I also want to congratulate him on a well-deserved retirement.

Now moving into the financials for the quarter. We reported net income of $47.6 million and a diluted EPS of $1.06, an increase of $3.7 million and $0.09 per common 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 increased by $3.9 million and 7 basis points, respectively.

As Peter mentioned, this is the fifth consecutive quarter that we expanded both our NII and NIM. A primary reason for this improvement is our fixed asset repricing, whereby cash flows from our fixed rate assets are rolling off at lower interest rates and being reinvested at higher current rates. During the quarter, this repricing contributed approximately $3.2 million to our NII. Partially offsetting this benefit is the deposit remix, which represents deposits shifting from noninterest-bearing and low-yielding deposits to higher cost deposits. The deposit mix shift has moderated during the past several quarters. And during the second quarter, the mix shift was $59 million and had a $500,000 negative impact on our NII. This compares to a mix shift of $37 million during the first quarter and $448 million during the same period last year.

During the quarter, the cost of our deposits remained stable at 160 basis points compared to the linked quarter and declined by 21 basis points compared to the same period last year. Our beta on this recent downward cycle is currently at 29%. During the quarter, our cost of deposits declined by -- our cost of CDs declined by 15 basis points, and we believe that an opportunity still exists to continue to reprice down these deposits. During the next 3 months, over 51% of our CDs will mature at an average rate of 3.61%, and we anticipate that the majority of these CDs will reprice lower.

With rate cuts forecast for later this year, we are comfortable with our balance sheet position and our fixed asset ratio of 55%. And with $7.3 billion of floating rate assets and $10.1 billion of interest rate-sensitive liabilities, we believe that we are well positioned to navigate any changes in the current interest rate environment. We are also closely monitoring our swap portfolio. At the end of the quarter, we had $2.2 billion of active pay fixed received flow interest rate swaps at a weighted average fixed rate of 4%. $1.5 billion of these swaps are hedging our loan portfolio, while $700 million are hedging our AFS securities.

In addition, we have $600 million of forward starting swaps at a weighted average fixed rate of 3.1%. $200 million of these swaps will become active later this year, while the remaining $400 million will start in the middle of 2026. Noninterest income increased to $44.8 million during the quarter compared to $44.1 million in the linked quarter. Noninterest income during the current quarter included a onetime gain of approximately $800,000 related to a BOLI recovery, while the linked quarter included a $600,000 charge related to a Visa B conversion ratio change.

Adjusting for these noncore items, noninterest income declined by $700,000 due to lower customer derivative activity, partially offset by an increase in earnings in connection with our trust services business. We are forecasting that noninterest income will be between $44 million and $45 million for the remainder of the year. Noninterest expense was $110.8 million compared to $110.5 million during the prior quarter. Included in noninterest expense this quarter was a severance-related charge of $1.4 million, while the linked quarter included seasonal payroll taxes and benefit expenses of $2.8 million and an FDIC special assessment reimbursement of $2.3 million. Excluding the impact of these items, noninterest expense was down $600,000 compared to the prior quarter.

This change was primarily due to lower incentive compensation and medical insurance charges, partially offset by our annual merit increases that took effect in early April. The percentage increase in forecasted expenses remains unchanged at 2% to 3%. During the quarter, we recorded a provision for credit losses of $3.3 million, and our effective tax rate was 21.2%. The decline in our tax rate during the year is being caused by higher tax-exempt investment earnings as well as certain discrete items. We now expect our tax rate for the full year to be between 21% and 22%. Our capital ratios remained above the well-capitalized regulatory thresholds during the quarter with Tier 1 capital and total risk-based capital improving to 14.2% and 15.2%, 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 shares of common stock 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 third quarter.

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

Thanks, Brad. This concludes our prepared remarks, and now we'd be happy to take your questions.

[Operator Instructions]

And our first question comes from Jeff Rulis of D.A. Davidson.

I wanted to check back in on the margin path. I think we've kind of talked about or you've referenced maybe a 250 margin by year-end, maybe not a Q4 average. But I want to see if that path is reasonable. And kind of the second part of that question is sort of the cost of funds sort of stalling out a little bit and I think mentioned some CD opportunities, but particularly on that side, it sounds like the opportunity is on the earning asset yield, but sort of 2 parts. Sorry for the lengthy question.

Sure. This is Brad. I think -- as far as the NIM, I do think 250 is an achievable number. I don't see anything that's going to get in the way of that path. I mean, again, this was our fifth consecutive quarter of expanding our NIM, and I think that's going to continue.

As it relates to our cost of deposits, our spot rate at the end of the quarter was at 1.58%. And I do think our beta, it is at 29%. I think after the CD repricing this quarter, I think we've got the opportunity to pick up about 15 to 25 basis points on that CD repricing. I think our beta is going to be north of 30%. And so I think we're going to see this quarter, assuming no rate cuts, a continued beta that continues to move towards 35%.

Perfect. Okay. And more of an other question is just on sort of balance sheet growth, based on loan growth, more of the question on securities, should loan growth be on a net base be modest? Do you see yourself continue to grow the securities balance from here?

Yes. Yes, I do think we're going to continue to see the securities portfolio grow. I mean, I think this quarter, the cash flows were about $170 million, and we invested in our investment portfolio about $270 million or $275 million. So we are increasing that portfolio when we see an opportunity if there is modest loan growth or if liquidity increases, we're using that excess liquidity at the moment to increase our investment portfolio.

I want to touch on the diversity of what we're purchasing in the portfolio.

Yes, that's a good point. I would also add that we continue to sort of balance our purchases between fixed and floating rate. And so this quarter, it actually leaned more towards floating rate. I think 55% of our purchases are floating securities. And then the other portion, obviously, 45% are in fixed securities.

Our next question comes from Jared Shaw of Barclays.

I guess maybe just on C&I, any trends that we should be thinking about that to call out on the delta there this quarter? And how is commercial customer sentiment and pipelines and thoughts for the year there?

Yes. I'll -- Jerry, maybe I'll start and Jim can specifically speak to C&I. On the commercial book, we were, frankly, a little disappointed with the performance this quarter. We took a 6% year-on-year average commercial loan position. But on a linked basis, just about flat. And that was really pretty much across the board. CRE, which had been an 8% performer on a year-on-year basis was flat. As you pointed out, C&I was down pretty substantively.

And construction took a bit of a pause. And I think that's a little bit of a more structural than cyclical situation. I think there is some opportunity there. So yes, it was an off quarter. I'm hoping that if and as we get a little more clarity around the environment with the tariff situation and the like, we can begin to resemble more the year-on-year average loan basis in commercial. But yes, you're not incorrect. It was a little bit of a disappointing quarter commercial production-wise for us.

And Jim, do you want to touch on C&I?

Yes. I think what I would say is that we have seen pipelines continue to build from the beginning of the year. Obviously, it wasn't a terrific quarter, but I think it was driven by 2 things, right? The greater uncertainty that we saw in the market, which obviously impacted loan volumes or at least put what we put on the books. And then we just saw some unusually high level of prepayments on a couple of loans, which resulted in the decline. I think as we go forward and we begin to see the pipeline start to materialize, we'll move back into a modest level of growth as we move towards the end of the year.

Okay. All right. And then on the deposit side, if we look at DDAs as a percentage of deposits, it's staying pretty flat. Is this -- is that how we should maybe think about it staying right around the 26% level and as total deposits move, DDAs sort of stick with that? Or is there a potential opportunity for those to move higher or lower...

Well, yes, we've got a lot of effort and energy around building DDAs. Obviously, given the rate environment, those are high-margin products for us. I was encouraged that average NIBD for the quarter was up 1% on a linked basis as compared to minus 0.2% on a year-on-year average basis. So we are seeing some acceleration there. Whether we can get numbers well beyond that, I'm not sure. As much as we'd like to build demand deposits, all of our competitors would like to build demand deposits. So it's a pretty competitive crowded space. So we'll see. I mean it's an important product for us, and we're going to do our best to try and make that an outsized component of our overall deposit base.

And our next question comes from Andrew Terrell of Stephens.

I wanted to check in on expenses first. It sounds like still thinking that kind of 2% to 3% expense growth rate. It seems like that kind of implies a little bit of a step back in the back half of the year, a little bit of relief on expenses in the next couple of quarters. Just wanted to see if you could kind of confirm that and just maybe refine kind of back half expense expectations.

Yes, I think that's right. I mean I think, obviously, the first quarter was elevated. The second quarter, we had a severance charge of about $1.4 million. So I do think it will take a step back in the second half of the year. We still feel comfortable with the 2% to 3% increase from the prior year. And so yes, I think you should see expenses come down from where they were during the first 6 months of the year.

Great. I appreciate it. And then I also just wanted to check in just kind of on capital priorities. I know you've got a buyback out there. We've talked about some securities restructuring at a certain point in time. But I just wanted to take your temperature on what makes sense or kind of what you're thinking about from a capital standpoint today.

Yes. So I think we're probably going to maintain our hold position on buybacks until we get a little better clarity around both the economy and the rate path forward. Around securities repurchases, we're not -- we don't have anything significant planned there. But certainly, to the extent that we pick up certain income opportunities, the opportunity to reconstitute those gains into securities repositioning is something that we think about. So probably the way I'd frame that is nothing dramatic at all. But opportunistically, as we see opportunities in our income stream to help kind of smooth the balance sheet, that's what we would pursue.

[Operator Instructions]

And our next question comes from Kelly Motta of KBW.

If I could, I'd like to circle back on the components of margin, specifically the expected cash flows off of the securities book and loans fixed and adjustable resetting expectations over the back half of the year. Do you have the expected cash flows on that just so we can manage NII assumption from here?

I would say the cash flows are going to be in the range of $550 million, like in total. I think it's going to -- these are contractual. It's not an acceleration of prepayments or anything like that. And so I think $550 million is probably what to expect. And as far as what they're coming off that, I think what you saw in the first and the second quarter. If you took those together, I think there have been some minor blips in both periods. But if you look at them together, I think that's probably a reasonable average of what they'll come off at. And then the reinvestments, obviously, should be stable unless there are changes in interest rates. And then obviously, that we'll see a slight shift based on that.

Got it. And then switching over as a follow-up to the expenses and the run rate coming down in the back half of the year. How much of that may be pushing off certain investments into 2026 and beyond versus are there any -- because expenses are otherwise well controlled, anything you're doing to help mitigate expenses here and cost containment efforts, just to get a sense of the moving parts of the back half of the year coming down?

Yes. Kelly, I'll begin on that. Maybe Brad can clean up whatever mess I create. But I think that no, we're not curtailing investment expenditures. That, frankly, is not in the plan, and I don't see environmentally the need to do that. We've got a lot of interesting ideas and thoughts out there that are going to require some capital investment, and we're happy to do that and garner a quality return around those.

In terms of just bringing down expenses in general, that is, frankly, a discipline that we're deploying in every quarter. And we did -- you did notice the severance in the quarter. That really was a result of some restructuring that we've done. I would anticipate that we'll probably see some more of that in the third and fourth quarter, but nothing major, but really just kind of reflective of our intent to always be looking to figure out ways to bring down expenses to the organization.

Got it. That's helpful. And then in terms of overall deposit flows, deposits were down this quarter. Can you remind us any seasonality in there? And being that deposits will likely be the driver of the size of the balance sheet, just kind of overall expectations in terms of the outlook for deposit growth from here?

Yes. I think there is some seasonality into the quarter, the second quarter as well as, frankly, the third quarter. When we look at the past 4 years of deposit balances intra-year, the second and third quarter are kind of the shoulder quarters, if you will. As far as what we're expecting for the balance of the year, frankly, I would anticipate that if we come out flat from where we are, but improve to Jared's question a few minutes ago around the componentry, hopefully laying a little bit deeper into NIBD, that's about where we would think would be an appropriate place for us to end up.

This concludes our question-and-answer session. I'd like to turn it back to Chang Park for closing remarks.

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.

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