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spk00: Welcome to the Bank of Hawaii Corporation third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Cindy Weirich, Director of Investor Relations. Please go ahead.
spk03: Thank you. Good morning, good afternoon, everyone, and thank you for joining us today as we discuss the financial results for the third quarter of 2023. Joining me today is our CEO, Peter Ho, our CFO, Dean Shigemura, our CRO, Mary Sellers, and our IR Manager, Chang Park. Before we get started, let me remind you that today's conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, there are a variety of reasons the actual results may differ materially from those projected. During the call this morning, we will be referencing a slide presentation as well as the earnings release, both of which are available on our website, boh.com, under the Investor Relations tab. And now I'd like to turn the call over to Peter Ho. Peter?
spk01: Thanks, Cindy. Good morning or good afternoon, everyone. We appreciate your interest in Bank of Hawaii. Before we begin, I'd like to acknowledge the tragic events of August 8 on Maui and in particular in Lahaina. We are so fortunate that all of our employees on Maui are safe. Unfortunately, our Lahaina branch was destroyed. I'm incredibly proud of and thankful for our Maui leadership team who immediately mobilized into action as the tragedy unfolded providing support to our affected employees, our customers, and the broader Maui community. Here in Oahu, over 100 of our staff have teamed with Hawaii Community Foundation to provide processing support for the Maui Strong Relief Fund, which now totals over $150 million. The recovery of Lahaina will take both time and patience. Bank of Hawaii intends to be there every step of the way. Now onto the quarter. We produced another solid financial performance for the third quarter. Average deposits grew nicely in the quarter. Loan levels were flat. Margin continued to be pressured by the inversion in the curve, although we witnessed a material slowdown in margin erosion compared to the prior quarter. Expenses were well controlled, and we improved our capital levels meaningfully. Credit, as Mary will share with you, remains a very good story for I'll start off with some commentary on funding and then touch on broader market conditions in Hawaii. I'll then hand it over to Mary, who will discuss credit, including the impact of Lahaina wildfires. And then Dean will then share with you some more granular color on the financials. So why don't we start, Chang, with the deposit market share slide? This is generally where I like to begin. And just to remind the audience that Hawaii is an interesting deposit market. It's a market where Effectively, five local institutions hold 97% of the bank deposit market share. The data that you're looking at here is the most recent edition of the FDIC's annual summary of deposits. And unfortunately, we're happy to see Bank of Hawaii right up there at the top. Really, as a result of a lot of hard work over the past 125 years serving banks, Hawaii's consumers, businesses, and municipalities. Today, our deposit balances are 48% consumer, 41% business, and 11% municipal. In terms of deposit makeup, you see that 58% of our deposits are either insured or uninsured but collateralized. The deposits are incredibly long-tenured, so more than 50% or 53% of our deposits are 20 years or older by relationship, and 75% of our deposits are 10 years or older by relationship. For the quarter, we had a spot increase of 1.4%, taking us to $20.8 billion for the third quarter. You'll see here Really, for the balance of 2022, our deposit base has been pretty darn stable. Average balances in the quarter were actually up 2.4%. Average balances were, I want to say, $20.5 billion for Q3 as compared to $20 billion for Q2. Comparing us to the broader national market of what H-8 deems as the small banks, you see that on a year-to-date basis, Bank of Hawaii has performed quite nicely versus the broader national competitor set. On to the funding side of deposits. Really, we take what we believe is a very unique marketplace. We take a unique market position within that marketplace and take really a brand or leading top of mind brand position within the market to generate meaningful pricing advantages over kind of the median mid-sized bank. Here you see that in cost of interest-bearing deposits. On the next slide, you'll see that that also extends into funding costs for total deposits. And then on, obviously, into betas, which are meaningfully lower than our primary competitor sets. So in addition to having a very stable and strong deposit base over the year, we also have built quite meaningfully our tertiary or secondary sources of liquidity. So here you see, as of the third quarter, our backup liquidity, as we like to say, is up to $9.6 billion, the price of cash securities available FHLB and or FRB borrowing capacity. And so this $9.6 billion, as you can see, is well in excess of our uninsured or uninsured and uncollateralized deposit base. Switching gears now to the local economy, performance remains strong. Unemployment as of September was still down below that of the national average. So at least from an employment standpoint, the state is performing quite nicely versus our U.S. mainland marketplace. Too early to tell what the impact of the Maui fires will be on employment, but I think we could probably anticipate somewhat of a step up here. But I think the fact of the matter is the supply of labor will still be challenging relative to the overall demand. And so really what I think we'll experience on Maui is not so much a lack of worker demand, but just logistics and how to get workers into the right places. The visitor industry continues to do well. So year to date, the state has experienced nice growth, both in spending as well as arrivals, up 10%. by spending up 8% by arrivals, got there in a little bit different way from the recent past. The U.S. market has moderated a bit, as we were anticipating, but that has been more than offset by a nice pickup, as you can see, in both Japanese visitors and spending, as well as by other countries, Canada, Australia, etc., In August, the wildfires on Maui were on August 8th. You can imagine that had a pretty meaningful impact to visitor statistics for August. We were down 9% by expenditure and 7% by arrivals as basically Maui came to a standstill. So Maui for August, as you might imagine, had expenditures declined just about 50%. Arrivals were down 57%. But if you back those numbers out from the overall state, the state was actually still pretty robust at plus 6% and plus 16% ex-Maui. Our understanding or our sense for the visitor industry going forward is kind of a ramp up back to a more normal environment post Lahaina. Lahaina itself really is driven by Kaanapali, which is the primary visitor accommodation site in that part of the island. That sector or that region right now is accommodating a number of federal and FEMA employees, so they're faring well with a little bit different kind of visitor stop than they're used to. The idea or the plan there is to, over the course of this year, transition from that former visitor back to the traditional U.S. or international visitor. We'll see how that progresses, but it seems like, it sounds like, from what we're hearing from the hotel side, that that is progressing. Other parts of Maui, which were impacted by the Lahaina fire, are beginning to see green shoots, I'd say, of activity. And there is, I think, a fair amount of optimism that those outlying areas of Nye will bounce back. So our sense is that, you know, of course, Lahaina quite expectedly has had an impact on the visitor industry, continues to in the short run. But over the next several months, we're hoping to see a trajectory towards more toward normalization again. On the next page, you see REVPAR or Revenue Per Available Room for the state, which continues to be a very positive story. And Mary has some slides a little bit further in the deck to support that further. And then finally, to finish off with the real estate, residential real estate market here on Oahu, which is our largest marketplace. There we see kind of a mixed bag by median sales price. So these are September on September numbers down 4.5% for single-family homes, but up 6% for condominiums. But what's interesting is despite a pretty meaningful reduction in sales activity, inventory levels remain extremely low. So month inventory for single-family homes at 2.7 months Months of inventory for condominiums on Oahu at three months. Days on market still well below at 20 and 21 days. So I'll stop there. And now let me turn the call over to Mary, who can share with you some credit performance for the third quarter. Mary?
spk02: Thank you, Peter. Bank of Hawaii's lending philosophy is grounded in two fundamental tenets. blending in our core markets of Hawaii and the West Pacific, and to long-standing relationships we understand. We combine this with ongoing discipline portfolio management, actively exiting those products or segments that have proven to have higher risk profiles. This positions our portfolio for continued lower net charge-offs through different economic cycles. Our loan portfolio is built on long-tenured relationships diversified by asset categories with 59% consumer and 41% commercial, has appropriately sized exposures, and is 79% secured with real estate with a combined weighted average LTV of 55%. Our commercial real estate portfolio, which represents 27% of the total loan portfolio, is diversified across the various asset types. The portfolio, built on relationships with demonstrated experience and financial capacity is conservatively leveraged with a weighted average loan to value of 55%. Our office portfolio is granular and has a weighted average loan to value of 56%. 25% of the portfolio is in the downtown Honolulu Central Business District. This segment has a weighted average loan to value of 63% and 47% of the exposure is further supported by repayment guarantees. 2% of loans in the office segment are maturing through 2024. While not immune from the changing dynamics impacting the office markets across the U.S., vacancy and rent remain stable in the Oahu office market as conversions to alternative use continue to reduce overall inventory levels as denoted in the gray bars. In the last five years alone, approximately 1 million square feet of inventory has been removed. Hawaii's supply constraints, driven off its unique geography and owner's regulatory process, serves to create relative stability in our real estate markets over the long term and less volatility during periods of stress. This is particularly pronounced in the housing sector, where severely limited supply, again in the gray bars, is compounded by the high cost of home ownership. These two factors continue to drive consistent, strong rental demand. Tight market conditions also continue to persist in the Oahu industrial market, with vacant
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