Participants

Chang Park; Director of Investor Relations; Bank of Hawaii Corp

Peter Ho; Chairman of the Board, President, Chief Executive Officer; Bank of Hawaii Corp

Bradley Shairson; Vice Chair and Chief Risk Officer; Bank of Hawaii Corp

Dean Shigemura; Vice Chair, Chief Financial Officer; Bank of Hawaii Corp

James Polk; Vice Chair, Chief Banking Officer; Bank of Hawaii Corp

Jared Shaw; Analyst; Barclays

Jeff Rulis; Analyst; D. A. Davidson & Company

Andrew Liesch; Analyst; Piper Sandler & Co

Kelly Motta; Analyst; Keefe, Bruyette & Woods

Presentation

Operator

Good day and thank you for standing by. Welcome to the Bank of Hawaii Corporation first quarter 2025 earnings conference call. (Operator Instructions). Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today's Chang Park. Please go ahead.

Chang Park

Good morning and good afternoon. Thank you for joining us today for our first quarter 2025 earnings conference call. Joining me today is our Chairman and CEO, Peter Ho; President and Chief Banking Officer, Jim Polk; CFO, Dean Shigemura; Chief Risk Officer, Brad Shairson; and our Deputy CFO, Brad Satenberg.
Before we get started, I want to remind you that today's conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, the actual results may differ materially from those projected.
During the call today, we'll be referencing a slide presentation as well as the earnings release. Both of these are available on our website, boh.com, under the Investor Relations link. And now I would like to turn the call over to Peter.

Peter Ho

Thanks, Chang. Good morning, everyone. Thanks for joining the call. Bank of Hawaii posted yet another solid quarter to begin 2025. Net interest income and net interest margin both improved meaningfully. This for the fourth consecutive quarter.
Net interest income grew just over 4.6% on a linked basis to $125,800 million. Net interest income was up as well on a linked basis. Expenses were controlled quarter-over-quarter. Period-end deposits and loans grew 7.3% and 1.1% annualized on a linked basis to $21 billion and $14.1 billion, respectively. Non-interest-bearing deposits were stable in the quarter.
Credit quality remained pristine in the quarter with net charge-offs and NPAs of 13 and 12 basis points, respectively. Capital levels have improved substantially from a year ago. I'll now take a moment to discuss the franchise and market conditions. Brad will then briefly touch on credit conditions, which, as I mentioned, are looking quite strong.
Finally, Dean will dig a little deeper into the financials, and then we'd be happy to take your questions. The Bank of Hawaii brand continues to perform well in our unique Hawaii market, one of the number one position in market share, as shown in the latest FDIC annual summary of deposits. Bank way leads in deposit market share growth on both short term and -- on both the short-term and long-term basis.
Deposit growth remained measured in the quarter as we prioritized margin over volume. Importantly, non-interest-bearing demand plus other low-yielding deposits continue to trend positively. Deposit funding costs fell for a second straight quarter of both an interest-bearing and total deposit cost basis. Economic conditions remained stable in Hawaii. Unemployment remains well below the national average.
The visitor market remains stable but continues to be impacted somewhat by the Maui market. Residential Oahu real estate trends remain positive. Now let me turn the call over to Brad.

Bradley Shairson

Thanks, Peter. The Bank of Hawaii prioritizes serving our community, lending in our core markets where our expertise enables us to make sound credit decisions. Majority of our loan book is to long-standing relationships but about 60% of our clients on both the commercial and consumer side having been with us for over 10 years.
This combination has greatly contributed to our strong credit performance for many years and has resulted in a loan portfolio that is 93% Hawaii, 4% Western Pacific and just 3% Mainland, where we support our clients that do business in both Hawaii and on the Mainland. As I walk through our credit portfolio's first quarter performance, you can see that it has remained strong and is consistent with prior 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 lend predominantly on a secured basis against real estate. 86% of our consumer portfolio is 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 759, respectively. Moving on to commercial, our portfolio size is $6.2 billion or 44% of total loans. The largest share of commercial is commercial real estate with $4 billion in assets, which equates to 29% of total loans.
This book is well diversified across industries and carries a weighted average LTV of only 55%. Looking at the dynamics for Hawaiian real estate in Oahu, the largest market, a combination of consistent vacancy rates and flat inventory levels supports 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, driven by conversions. This long-term trend of office-based reduction as well as return to office has brought the vacancy rate almost back to its 10-year average. Breaking down our CRE portfolio, it is well diversified amongst property types with no sector being greater than 7% of total loans.
Our conservative underwriting has been applied consistently with all weighted average LTVs between 53% and 56%. You can see that overall, it's a diverse 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 1.9% of CRE loans have greater than 80% LTV and almost nothing is over 85%. Turning to C&I, which comprises 12% of our total loans, you will notice that it is extremely well diversified across industries with small average loan sizes. In addition, a very small portion of loans were leveraged. Turning to our asset quality, credit metrics remained stable, and our asset quality remains strong.
Net charge-offs were $4.4 million at 13 basis points annualized, up 3 basis points from Q4 and 6 basis points from a year ago, while nonperforming assets came down 2 basis points from the linked quarter. Delinquencies ticked down by 4 basis points to 30 basis points this quarter. Criticized loans dropped by 2 basis points to 2.08% of total loans and just 11 basis points higher than a year ago. And 75% of those criticized assets are real estate secured with a 54% LTV.
As an update on the allowance for credit losses on loans and leases, the ACL ended the quarter at $147.7 million, that's down $800,000 from the linked period and flat to last year. The ratio of our ACL to outstandings was 1.05%, that's down 1 basis point from both the linked quarter and last year's first quarter.
I'll now turn this over to Dean for an update on our financials.

Dean Shigemura

Thanks, Brad. We expanded our net interest income and net interest margin for the fourth consecutive quarter. Net interest income for the first quarter was $125.8 million, and the net interest margin expanded to 2.32% increases of $5.6 million and 13 basis points from the fourth quarter, respectively. The improvements in NII and NIM resulted from asset cash flow repricing and lower deposit rates.
In addition, the headwind from our deposit remix from noninterest-bearing and lower-cost deposits into higher cost deposits slowed significantly. During the first quarter, our earning assets with fixed or adjustable rates generated $553 million of cash flows from maturities and prepayments. Reinvestment of these cash flows into current market rates, -- at current market rates resulted in incremental growth of $3.7 million in quarterly net interest income with a spread of 2.6%.
With a fixed asset ratio of 56%, we are well positioned for a variety of rate environments, and we'll continue to realize positive NII from fixed and adjustable asset cash flow repricing even if rates were to fall. We again realized slowing deposit mix share with average non-interest-bearing and low yield interest-bearing deposit balances declining by $37 million linked quarter.
This compares to a decline of $488 million and $105 million in the same period in 2024 and linked quarter, respectively. Assuming the majority of these balances shifted into higher-yielding interest-bearing deposits, such mix shift negatively impacted our net interest income by $300,000 in the first quarter down from the negative $900,000 impact in the fourth quarter.
Total deposit costs decreased by 17 basis points linked quarter and 27 basis points since the Fed began reducing the Fed funds rate in September and total deposit costs remained well below peers. Deposit costs are expected to fall further as we continue to reprice our time deposits lower. 74% of total time deposits are scheduled to mature in the next six months.
With interest rates continuing to be volatile and unpredictable, we are managing our exposures to our fixed asset mix and hedging program. As I previously mentioned, our fixed asset mix declined slightly to 56% during the quarter and we maintained our interest rate hedges at $2 billion notional. Earlier in this second quarter, we added $200 million of currently active pay fix received floating swaps with an average fixed rate of 3.4% and an average maturity of 2.5 years.
In addition, we added $200 million of forward starting swaps that will become active in one year with an average rate of 3.17%. These are in addition to the 2 billion active swaps and $300 million in forward starting swaps that were in place at March 31. Thus, our current active swap position is $2.2 billion with an average fixed rate of 3.97% and average maturity of 1.9 years.
We also now have $500 million of [forward] starting swaps with an average fixed rate of 3.09%. During the quarter, we purchased $242 million of securities that have a positive 110 basis point spread to cash, improving our net interest income and margin. We continue to strategically position our balance sheet for a range of rate outcomes.
Our rate-sensitive assets totaled $7.4 billion, while our rate-sensitive interest-bearing deposits were $10.2 billion at the end of the quarter. We intend to continue to closely manage the interest rate sensitivity of our balance sheet to ensure that we are well positioned for a variety of rate environments. Non-interest income totaled $44.1 million in the first quarter, which included a $600,000 charge related to the Visa Class B conversion ratio change.
In the fourth quarter, non-interest income was $45.4 million after adjusting for a $2.4 million charge for a similar Visa Class B conversion ratio change. Adjusting for these non-core charges, first quarter adjusted noninterest income was $44.6 million, lower by $800,000 from the adjusted fourth quarter noninterest income as revenue from trust services were negatively impacted by market volatility and customer derivative transactions were also lower.
Non-interest income is expected to be $44 million to $45 million per quarter this year as market volatility and uncertainty continue to pressure trust services revenue and other transaction volume. Reported expenses were $110.5 million in the first quarter. This compares to expenses of $107.9 million in the fourth quarter. Included in the first quarter expenses were $2.8 million of seasonal payroll taxes and benefits expenses related to the payout of annual incentives [investing] of restricted shares.
Also included was an FDIC special assessment reimbursement of $2.3 million offset by an increase in our variable incentive compensation expenses and an increase to our medical costs during the quarter. Expenses continue to be a focus in 2025 with core expenses projected to increase 2% to 3% from 2024, which includes an allocation of 1% of expenses to invest in revenue-enhancing initiatives in wealth, mobile and data analytics.
As a reminder, the second quarter's expenses will include an annual merit increase of approximately $2 million per quarter. To summarize the remainder of our financial performance, in the first quarter, net income was $44 million, and earnings per common share was $0.97. The increases of $4.8 million and $0.12 per common share linked quarter, respectively.
Our return on common equity was 11.8%, up from 10.3% linked quarter. We recorded a provision for credit losses of $3.3 million this quarter. The effective tax rate in the first quarter was 21.67% and the effective tax rate for the remainder of 2025 is expected to be approximately 22.5%. We continue to maintain healthy excesses about regulatory minimum well-capitalized requirements.
Our Tier 1 capital ratio is 13.9% and total capital ratio of 15%. Our risk-weighted assets to total assets ratio remained well below peer median, reflecting the low-risk nature of our assets and provides greater flexibility on future asset mix and liquidity. During the first quarter, we paid out $28 million to common shareholders and dividends and $5.3 million in preferred stock dividends. And finally, our Board declared a dividend of $0.70 per common share for the second quarter of 2025.
Now, I'll turn the call back over to Peter.

Peter Ho

Thanks, Dean. This concludes our prepared remarks. Before we move on to Q&A, I'd like to congratulate Dean, on a much-deserved retirement from his CFO role at the company. Dean has been an integral part of the team for years now, and he will be missed. He's retirement date from the CFO role is set for June 30.
I'm also very excited to announce that our Deputy CFO, Brad Satenberg, will be taking over the CFO role effective June 30. Brad already manages a large part of the finance operation has been part of our IR efforts for many months now. And now we'd be happy to entertain whatever questions you might have.

Question and Answer Session

Operator

(Operator Instructions) Jared Shaw, Barclays.

Jared Shaw

Hey, good morning. Good afternoon, everybody. Dean, congratulations on a well-deserved retirement. And Brad, congratulations on your new role and looking forward to working with you more going forward, too. Maybe just first on the margin. In the past, I think you had indicated a 2.50 target or goal or opportunity as we got towards the end of the year. Is that something you still feel is attainable here?
And I guess, as a component of that, how should we think about the ability for deposit costs to continue to come down more broadly in more of a static rate environment.

Peter Ho

Let me take a stab at that and Dean and Brad can clean up whatever I mess up. The 2.50 is [ex] I think, came about as a question a couple of calls ago around whether or not we could attain that level mechanically given how the balance sheet is geared. We still believe that is a possibility what would have to happen is we, -- the fixed asset turnover as you know, was pretty mechanical at this point because most of those amortizations are running at contractual levels.
So that's pretty -- out of everything that's pretty much the biggest known. It looks like given where rates are and even rates possibly trend out that kind of that roll off to roll on premium is reasonably in good shape there. A driver of whether we can hit the 2.50 by year-end is going to be contingent upon our ability to continue to manage low-cost deposits in an effective way, which we have been able to the past couple of quarters, a couple of three quarters now at this point.
And then finally, if we were to get additional rate cuts at some point this year, that would actually be accretive to our opportunity here. So again, if you put all that together, Jared, and basically, yes, if things trend out the way they have for the past several quarters now, kind of that -- the type of number at 2.50 is definitely within range. If not, things could be otherwise. And then on top of that, if we do get rate cuts, that actually should depending on the timing of those cuts should be potentially accretive to the mix there.

Dean Shigemura

No, I don't have anything really to add. I think that is pretty accurate. And there is a path to 2.50 margin. However, as you know, the market has been quite volatile recently. So...

Jared Shaw

Okay. And what was the end of period deposit cost? The spot rate?

Dean Shigemura

The deposit cost was 1.6%.

Jared Shaw

That was the average of the spot or both?

Dean Shigemura

That was the average for

Jared Shaw

Yes. So do you know what the exit rate was?

Dean Shigemura

It's approximately above that level. And I think going forward, what we're seeing is on the time deposit repricing, that's what's going to give us a little more of a lay down on rates.

Jared Shaw

Okay. Got it. And then maybe on the credit side, did you change the -- any of the qualitative assumptions into the ACL discussion? Or did you did you change the weighting of any of your scenarios this quarter?

Dean Shigemura

No. So we didn't really change anything from the qualitative. As you know, obviously, using our UHERO forecast and looking at the economy in Hawaii. The economy -- the outlook on the economy is a little bit worse than it was previously but we didn't change any real qualitative factors there.

Operator

Jeff Rulis, D.A. Davidson.

Jeff Rulis

Thanks. Good morning. Maybe taking a step back, Peter, on the economics of front. Just to touch on the tariff-related impact or perceived impact and maybe tourism just to kind of get a handle on what you're seeing real time, if anything, that's disrupted?

Peter Ho

Tourism for the most part, year-to-date hung in there pretty nicely. There are early indications that Canadian traffic, which is a meaningful component of our market. [It has] been affected by the sentiment around the tariffs. Early to tell, but I think that that's not likely to go unscathed, given all the chatter that's been out there, Jeff. The Japan market I don't -- it's hard for us to tell whether that segment sentiment wise is going to be impacted.
And those really are kind of the big international drivers. For now, the U.S. domestic consumer continues to hang in there pretty nicely. So I would anticipate the reasonable possibility for kind of a flattish year and visitor this year. And obviously, if the economy begins to trend out a little bit worse than what we're looking at right now, that may change. And if tariff sentiments become even more inflamed, that may change as well.

Jeff Rulis

Got it. And maybe sort of in a related more specific to your outlook on loan growth, and I think you exited the year with some pretty good pipelines. And I guess has that, in the last few months, sort of disrupted thoughts on expectations for this year? Are you seeing any -- from a customer standpoint, on the net growth front. Are those the same components that you've mentioned? Or is the -- has that shifted some?

Peter Ho

I'll let Jim, talk to that.

James Polk

Yes. I'd say our outlook at this point remains the same as the guidance we've given previously kind of in that low single digit, again, noting sort of the greater uncertainty in the market could have an impact on that, obviously, going forward. But we -- the commercial pipeline remains pretty solid. We actually saw a pickup in a number of transactions and opportunities and value in Q1.
And on the consumer side, we've seen a nice pickup in daily applications on both the mortgage and the HELOC front, which we believe at least will get us a chance to maybe offset some of the runoff we've seen in more recent quarters. So I think we're still in line with what we've been providing in the past, and we'll see how the market continues to evolve given what's happening out there.

Jeff Rulis

Got you. And maybe one quick last one. It's a small number, but just a little increase in the net charge-offs still peer-to-peer very solid. Brad, I don't know if there was anything that it's noteworthy to call out or it was just a little lumpy, but anything to touch on there?

Bradley Shairson

Well, so what I would say about the net charge-offs, actually, consumer was actually down slightly from last quarter. It was really the small increase was just caused by a single loan that was about $1.1 million that was in -- formerly in the nonperforming assets, and we've since charged it off. So actually, the trend is pretty positive there.

Peter Ho

Yes. I mean so the NCO performance is kind of the outcome of the rule of small numbers, Jeff.

Jeff Rulis

Ok. I didn't mean to make to much light of it. Just check in. So thanks.

Operator

Andrew Liesch, Piper Sandler.

Andrew Liesch

Thanks. Good morning, everyone. Thanks for taking the questions. You've covered most everything I want to go over. Was just on the new swaps that were added, what does that then shift the fixed rate percentage of earning assets to relative to that 56% that you had at March 31.

Dean Shigemura

It brings it down a little to about 55%. So there's a little bit of lower mix -- fixed asset mix.

Andrew Liesch

Got it. So not too much of additional that.

Dean Shigemura

I would add -- yes, we're -- it's continuing to drift lower. But the -- just to clarify that also that the investments, they come off at a fixed rate. So using the swap portfolio to make adjustments to that.

Andrew Liesch

Got it. Very helpful. And then it sounds like you had some pretty constructive commentary for loan growth in the pipeline. But have you seen any projects like fall out of the pipeline with concerns over the economy and some uncertainty there? Or is it really just sort of building?

Peter Ho

Yes, not at this point. I think there's a lot of conversations going on between developers and suppliers and contractors as they try and get a handle on the situation. But it's pretty fluid at this point. So I think we're going to just have to kind of see how things evolve. But at this point, the deal -- the transactions we see are still moving forward.

Bradley Shairson

Yes. I mean we're not seeing anything in particular right now. But I would -- not caution, frankly. I mean, I think it was such an uncertain environment that we could see pipeline trends move pretty quickly here, certainly on the commercial side. So we're hopeful that we can hang on to our current guidance, but I would no caution around that.

Andrew Liesch

Got it. Make sense. Thanks so much. You've covered everything else. I'll step back

Operator

And the next question will be coming from the line (technical difficulty).

Hey, good morning. Just to start, Dean, it's been great working with you the past several months. Congratulations. I look forward to hearing more about what you've got in store for retirement. If I could start just on the margin. If you have it, do what the margin for the month of March was just to start there?

Dean Shigemura

Yes, it was 234.

Got it. Okay. And if I could just clarify some of the commentary on the margin. It was all really helpful. But I mean, it sounded like you were fairly optimistic on hitting that [2.50] or so exit margin this year even without rate cuts? And then maybe if forward care plays out, and I hear you on the volatility, but we do get some rate cuts that would be accretive to that forecast. I guess was that a fair read on the margin commentary?

Peter Ho

Yes. I mean, I think the biggest driver of hitting that number is going to be the ability to hang on to non-interest-bearing and other lower-yielding types of deposits to the extent that we have stability in that space, that's going to allow the fixed asset turnover to kind of reveal its full capacity. So if we continue to have that phenomenon and basically overall reasonable deposit performance yes, that number becomes a reasonable target for year-end.

Dean Shigemura

And I would just add that I think the shape of the yield curve is also going to be important to that having a little bit of (technical difficulty) there, and the fixed asset repricing is dependent on higher yield or a higher rate on the midterm to longer term of the curve. So that would have an impact as well.

Yes. Okay. I appreciate it. If I could ask just on the point of deposits. I'm looking at the savings line that grew pretty materially this quarter. It seems like it does bounce around a little bit, at least the past several quarters or so. Is there any kind of predictable seasonality in that line item? Or could you just speak to end-of-period basis, pretty substantial growth? Just kind of what's driving that this quarter?

Peter Ho

Yes. Well, I mean, I think it was nice to see the bump up at quarter end. That could be some tax element in there. But when I look at the average deposit stats for savings there, kind of, call it, flattish on a linked basis, down actually 1%. So I think we're happy with our deposit levels, and we're just -- you do see some seasonality into the first quarter given what's happening with people's income taxes.

Okay. So more appropriate to think about it just from an average standpoint?

Peter Ho

Yes, I think so.

Okay. Fair enough. If I could just ask on expenses, and I apologize if I missed this in the prepared. Could you quantify if there was or to what extent there was a one-time benefit on the FDIC insurance line this quarter. And then just wanted to check in.
I think last quarter, we talked about 2% to 3% OpEx growth for the full year that included some reinvestment. It seems like you're tracking maybe a little bit above that as of the first quarter. Just wanted to check in to see if that 2% to 3% was still kind of a good expense growth guide for the year?

Dean Shigemura

Yes, there was a $2.3 million benefit on the FDIC line and the guidance is still 2% to 3% for the full year. And to clarify, it's based on our normalized 2024 results, which was $426 million. So to kind of simplify it, if you look at our reported numbers for 2024, it's really about 1% to 2% above that number, which came in at $430 million.
So that's still intact. In terms of how it's tracking over the year. We'll probably see about a similar level in Q2 as what we saw in Q1, but kind of trend a little bit lower in the second half of the year as some of our initiatives are implemented expense initiatives to reduce some of that.

Got it. Ok. So similar to Q2 is the 1Q. And then backs off from there. But, okay, very good. Those are all my questions. I appreciate it.

Operator

Kelly Motta, KBW.

Kelly Motta

Hi, good morning. Thanks for the questions. Congrats again, Dan and Brad, excellent news. So I was hoping if you could just circle back on the deposits. I really love the new color on CD repricing. In terms of where deposits are coming on now, it looks like you're running a section in the mid-3s. Is that a good kind of assumption for where the incremental role of CDs are coming on now?

Dean Shigemura

So the -- what we have in kind of our -- like our advertised specials they're in the mid-threes. But when you look at what really is coming on in the average rate, it's about 2.3 -- sorry, 3.3% to 3.4%. So a little lower than that and then about 30 to 40 basis points below what's maturing on.

Kelly Motta

Got it. Thank you. And also, can you remind us when the forward starting swaps when those start to kick in and the cadence of that just for the purposes of margin modeling?

Dean Shigemura

Yes. We have $100 million coming on in the third quarter, fourth quarter and first quarter and then $200 million in the second quarter of next year. We're kind of based out somewhat yes.

Kelly Motta

Got it. That's helpful. And I apologize if I missed this, but it looks like you guys acknowledge that there's really nominal tariff exposure, direct tariff exposure. Wondering what your outreach has been to clients, what you're what you're hearing and the work you're doing to stay on the ground and be in touch with your customers because you guys do have a great track record with managing for credit.

Peter Ho

Yes. Well, go ahead. Go ahead, Brad.

Bradley Shairson

Okay. Yes, that's a good question. So like many other banks, we've been running analysis to assess the potential impact on how tariffs might affect our clients. And we've determined that we do have that, as you mentioned, the nominal direct tariff exposure. Our analysis focused on where there would be direct impacts including industry verticals such as auto dealers, contractors, retail, wholesale trade, manufacturing and construction and excluding real estate secured loans with low LTVs.
And given that Hawaii's economy is really service oriented, this resulted in only 4% of loan portfolio or $640 million in exposure in total. And that number includes all the borrowers in these industries but in reality, a number of them may not be impacted much if their international trade is minimal or if they have wide profit margins.
And by the way, that's why we put that slide in on C&I, so this quarter. So that you could really get a sense for just how little exposure there is. It's very diversified. Our C&I is very diversified among a high number of industry segments and a very low average loan size.

Kelly Motta

Appreciate the [color]. I'll set back. Thank you very much.

Operator

Thank you. That concludes today's Q&A session. I would like to turn the call back over to Chang Park. Please go ahead for closing remarks.

Chang Park

Thank you, everyone, for joining us 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 questions. Thank you.

Operator

This concludes today's conference call. You may all disconnect. Thank you for joining.