BOH

Core Financial Performance

• Delivered 9th consecutive quarter of NIM expansion, driven by ongoing repricing of fixed-rate earning assets and disciplined deposit pricing. Average deposit cost remained stable at 127 basis points, with non-interest-bearing deposits still accounting for ~27% of total deposits.
• Hawaii's local economy remains resilient, supported by low unemployment, healthy visitor spending, strong construction activity, and sustained military investment; state projections call for 1.6% real economic growth in 2026.
• All regulatory capital ratios remain above well-capitalized thresholds: Tier 1 capital at 14.5% and total risk-based capital at 15.5%. The firm repurchased $17 million of common shares in Q2 at an average price of $78 per share, and the board declared a $0.70 per common share dividend for payout in Q3.

Credit Quality & Portfolio Structure

• 94% of total loans are originated in Hawaii, with 4% in the Western Pacific and only 2% on the US mainland, focused on existing local clients. 60% of both commercial and consumer clients have banked with Bank of Hawaii for over 10 years.
• Consumer residential mortgage/home equity loans have a weighted average LTV of 49% and weighted average FICO score of 799; all commercial CRE loans have a weighted average LTV below 60%, with less than 3% of CRE loans having an LTV above 80%. Over 60% of CRE loans mature in 2030 or later, limiting near-term refinancing risk.
• Overall asset quality remains strong: non-performing assets fell 1 basis point to 8 basis points, the allowance for credit losses (ACL) remained flat at $147 million, and the ACL to total outstandings ratio dipped 1 basis point to 1.03%. The small increase in the criticized asset ratio to 2.81% from 2.12% stems from a single well-secured borrower relationship, not broad portfolio weakness.

Strategic Initiatives

• The Center for Family Business & Entrepreneurs, launched in April 2026, continues to build its client pipeline for succession planning, estate planning, business valuation, and M&A advisory services, leveraging the bank's unique local market position.
• The bank is strengthening cross-functional coordination across commercial banking, private banking, Bankoh Advisors, and broader wealth management advisory capabilities. The Bankoh Advisors partnership with Cetera has driven improved efficiency, expanded product offerings, and advisor hiring growth.

• Net interest margin is still projected to approach 2.9% by the end of 2026 (December exit rate, not Q4 quarterly average), with the expectation of one 25 basis point interest rate hike in mid-September 2026 priced into this forecast. Management expects ~5 basis points of NIM expansion per quarter for the remainder of 2026, driven by ongoing fixed asset repricing.
• Full year 2026 total loan growth is still expected to land in the low-mid single-digit range, with moderated consumer lending growth in Q3 (driven by the absence of large closed condominium projects like the one that boosted Q2) offset by healthy commercial pipeline growth.
• Near-term deposit costs are expected to settle in the 1.25%-1.3% range. The firm expects ~10%-15% of its $2 billion in total high-cost (3.5%-4%) public deposits to run off in Q3, which will modestly reduce the size of the earning asset base.
• Normalized non-interest income is projected to be ~$43 million in Q3 2026, consistent with adjusted levels in Q2. Normalized non-interest expense is projected to be ~$112.5 million in Q3, bringing full year 2026 expense growth in line with the prior 2.5%-3% guidance range.
• The firm plans to repurchase an additional $20 million of common stock in Q3 2026, with management expecting to maintain a $20 million quarterly repurchase pace in Q4 2026 before reevaluating the plan entering 2027. A total of $89 million remains available under the current repurchase authorization.
• The long-term target of a normalized NIM of 3.25%-3.5% remains intact, with no expected material deviation from the projected multi-year trajectory despite the current higher-for-longer rate environment.

The firm operates across consumer lending, commercial lending, and wealth management segments, with overall Q2 2026 net income of $63.8 million (up 11% from Q1 2026) and diluted EPS of $1.47 (up 13% from Q1 2026).

1. Consumer Lending: Total consumer loans represent 56% of total loans, equal to approximately $8 billion. 86% of the consumer portfolio consists of residential mortgage and home equity loans, with auto and personal lending accounting for the remaining 14%. Net charge-offs for the overall loan portfolio were $3.4 million (10 basis points annualized) in Q2, up from an abnormally low 3 basis points in Q1 driven by a large prior quarter recovery.

2. Commercial Lending: Total commercial loans represent 44% of total loans, equal to $6.2 billion. 72% of commercial loans are secured by real estate, with CRE (the largest commercial component) totaling $4.3 billion, or 30% of total loans. C&I lending accounts for 12% of total loans, equal to $1.7 billion. Total loans grew $94 million in Q2, for an annualized growth rate of approximately 2.6% overall.

3. Wealth Management: This segment drove the majority of the $2.2 million increase in adjusted non-interest income in Q2 2026, which reached $43.3 million (up from $41.3 million in Q1 2026). Strength came from higher market valuations and increased customer demand for annuity investments and advisory services.

Net interest income (NII) for the firm increased to $153.6 million, expanding 4 basis points sequentially to a net interest margin (NIM) of 2.78%, marking the 9th consecutive quarter of margin expansion. Non-interest expense was $111.2 million in Q2, down from $116.1 million in Q1 driven by non-recurring charges in Q1.

• Deposit market competition has intensified as customers prioritize higher yields, which may limit near-term opportunities to reduce deposit costs, and has led to a modest increase in exception pricing and promotional CD rate adjustments.
• Elevated interest rates continue to pressure consumer lending growth in indirect auto and home equity segments.
• Higher interest rates are expected to provide an initial boost to NII and NIM, but will become a modest headwind once deposit costs fully reprice to the higher rate environment.
• Broader macroeconomic risks include sustained inflation, elevated energy costs, weakening consumer confidence, potential shifts in travel demand, and ongoing geopolitical and fiscal uncertainty that could impact the Hawaiian economy.

Q: What is the expected trajectory for wealth management fee growth for the rest of 2026, excluding the impact of strong equity market performance?

A: Management reports that roughly half of Q2 wealth management fee growth came from market gains, and half from core production growth, including higher testamentary and trust fees that are expected to be sustainable going forward. The Bankoh Advisors segment continues to improve efficiency, expand product offerings, and add advisors, which drives sustained organic sales growth independent of market conditions.

Q: What are the current competitive dynamics for deposit exception pricing, and what is the outlook for the securities portfolio size going forward?

A: Management notes that while competition has increased slightly and exception pricing requests are up, the changes have not been material, and the firm will only modestly increase CD rates for 3 and 12-month terms. The Q2 reduction in the securities portfolio was driven by the need to fund loan growth and deposit runoff; future portfolio size will be dictated by loan growth demand, with reinvestment proceeding at a pace matching net funding needs rather than a continued sustained shrinkage.

Q: What is the current status of commercial loan pipelines, and why is full year low-mid single-digit loan growth still achievable despite expected slower Q3 consumer growth?

A: Q2 residential consumer growth was boosted by a large condominium project closing that represented around 25% of Q2 residential production, so organic growth will return to normal lower levels in Q3, with continued pressure on indirect auto and home equity lending. Commercial pipelines have built steadily, with some deals originally expected to close in Q2 pushed to Q3, and overall commercial pipeline health remains strong enough to offset slower consumer growth and keep full year growth on target.

Q: Can you confirm the size of Bank of Hawaii's public deposit base, the planned reduction, and the outlook for the long-term margin trajectory?

A: The firm holds ~$2 billion in total public deposits, and expects 10%-15% of high-cost (3.5%-4%) public deposits to run off in Q3 as part of a strategic repositioning. The long-term target of a 3.25%-3.5% normalized NIM remains unchanged, and while the timeline to reach this target depends on future interest rate movements, there are no current factors that would cause a material deviation from the current multi-year trajectory.