S. Bradley Shairson

Thanks, Peter. The Bank of Hawaii takes great pride in serving our community, and this aligns to our long-standing credit philosophy, which has been to lend primarily in our core markets where our expertise enables us to make sound credit decisions.
Additionally, the majority of our loan book is to long-standing relationships where about 60% of our clients on both the commercial and consumer side have been with us for over 10 years. This combination has greatly contributed to our strong credit performance for many years, and it has resulted in a loan portfolio that is 92% Hawaii, 5% 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 current state, you'll note there has been very little change from last quarter. The lending philosophy I just mentioned is reflected in our loan growth, which has been steady and organic from 2019 to this past quarter, we averaged about 6% loan growth.
On the consumer side, which represents 58% of our total loans or $8 billion. We are predominantly lending on a secured basis against real estate, 85% of our portfolio is comprised of residential mortgage or home equity with a weighted average LTV of just 48% on a combined weighted average FICO score of 800. The remaining 15% of the portfolio is a combination of auto and personal loans where our average FICO scores are 734 and 759, respectively.
Moving on to commercial, our portfolio size is $5.8 billion, which is 42% of our total loan book. The largest share of commercial is commercial real estate with 3.7 billion in assets, which equates to 27% of total loans. This book is well diversified across industries and carries a weighted average LTV of only 55%.
Given that I covered CRE in great depth last quarter. I'll just take a few minutes to cover key highlights of our portfolio today. Starting with the stability of our real estate market, and it Oahu, vacancy rates remained stable, reflective of the Hawaiian economy and history of limited supply.
Industrial vacancy has continued to hover around its historic level, currently just 0.76% versus its 10-year average of 1.75% and at 13.56%, office vacancy is slightly more than 1% higher than its 10-year average office conversions and the long-term trend of office space reduction will continue to temper vacancy rates here.
Retail and multifamily vacancies remain on par with historical averages. And as I covered last quarter, inventory remains constrained with 10-year growth rates around 0% for all major property types with office space even coming down about 10% over the past 10 years.
Our CRE 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 50% and 60%. Overall, it's a diverse portfolio with low average loan sizes.
And our scheduled maturities have no maturity wall, but only 4.6% of loans due to mature this year and 10% next year, with more than half of our loans maturing in 2030 or later. Looking at the distribution of LTVs, the tail risk in our CRE portfolio for any loans with greater than 80% LTV totals $31 million, which is under 1%. And if we move that metric up to 85%, our CRE portfolio has less than $4 million of exposure.
Looking at our credit metrics, overall this past quarter compared to linked quarter metrics remained quite stable and asset quality remained strong. Net charge-offs were $3.4 million at 10 basis points annualized, up 3 basis points from Q1 and 6 basis points from a year ago. Non-performing assets have remained stable, increasing slightly to 11 basis points, roughly $15 million and delinquencies have also been stable, ticking down slightly to 29 basis points this quarter.
Criticized assets remained low at 2.23% of total loans with 74% real estate secured with a 56% LTV. As an update on the allowance for credit losses on loans and leases the ACL ended the quarter at $147.5 million, down $200,000 for the linked period and up $2.1 million year over year. The ratio of our ACL outstandings was 1.07%, and that's unchanged from prior quarter and up 3 basis points year over year.
I'll now turn this over to Dean for an update on our financials.

Dean Shigemura

Net interest income was $114.8 million in the second quarter, an increase of $0.9 million linked quarter and the net interest margin increased by 5 basis points linked quarter to 2.15%. Repricing from cash flows contributed $4.6 million of additional net interest income linked quarter, while continued deposit mix shift and repricing as well as a smaller balance sheet from lower deposit balances subtracted $4 million.
In addition, net interest income was positively impacted by an interest recovery, which increased net interest income by approximately $300,000 on a linked quarter basis. During the quarter, our assets continued to reprice higher, supporting net interest income and margin.
In the second quarter, cash flows from maturities and prepayments of our fixed and adjustable rate assets was $593 million. We continue to enjoy a greater than 3% spread on the cash flow from these fixed and adjustable rate loans being re-invested into Lake assets and investment securities, cash flows being re-invested into cash.
The annual cash flows from maturities and paydowns for the fixed-rate and adjustable rate assets are expected to be approximately $2.4 billion. In the second quarter, both our net interest income and net interest margin improved from the first quarter, while continued pressure on our deposit mix and pricing resulted in slightly higher overall deposit costs.
The rate of growth in deposit costs slowed significantly and asset cash pools continue to reprice our assets higher. As a result of our asset repricing higher, our overall yields have steadily increased and as discussed earlier, are expected to continue to increase as new asset yields are well in excess of runoff yields.
Non-interest income totaled $42.1 million in the second quarter, down $200,000 from the first quarter. As market conditions and transaction volumes were steady. We expect core non-interest income to be slightly higher in the second half of the year as market conditions improve.
In the second quarter, we continued to manage our expenses in a disciplined manner. Expenses in the second quarter were $109.2 million, which included a $2.6 million one-time industry-wide FDIC special assessment.
In addition, we recognized $800,000 of severance expenses in the quarter, which will result in $1.4 million of annual pre-tax expense reductions. And finally, $600,000 of other expenses in the quarter are not expected to reoccur in 2024.
Thus, the adjusted core expense level in the second quarter was $105.3 million. Core expenses in the first quarter were $103.2 million when adjusted for $2.2 million of seasonal payroll taxes and benefits related to payer -- incentive payouts and restricted stock vesting and $500,000 of severance expenses.
Thus, the adjusted core expense level in the second quarter was $2.1 million or 2% higher linked quarter, primarily due to the annual merit increases, which took effect on April 1. We continue to evaluate expense levels and expect normalized expenses in 2024 to increase 1% to 2% from 2023 normalized expenses of $419 million.
To summarize the remainder of our financial performance in the second quarter of 2024, net income was $34.1 million and earnings per common share was $0.81, a decrease from linked quarter of $2.3 million and $0.06 per share, respectively.
Our return on common equity was 10.41%. We recorded a provision for credit losses of $2.4 million this quarter. The effective tax rate in the second quarter was 24.77%. The tax rate for the full year of 2024 is expected to be approximately 24.5%.
In the second quarter, we successfully raised $165 million in connection with a preferred share offering. As a result, our Tier one capital ratio increased to 13.99% and the total capital ratio to 15.05%. Our risk-weighted assets to total assets ratio continued to be well below peer median, reflecting the low risk nature of our asset mix.
During the quarter, we paid out $28 million to common shareholders in dividends and $2 million in preferred stock dividends. We did not repurchase common shares during the quarter under our share repurchase program. And finally, a Board declared a dividend of $0.70 per common share for the third quarter of 2024.
Now I'll turn the call back over to Peter.

Peter Ho

This concludes our prepared remarks. Now, we'd be happy to take your questions.

Question and Answer Session

Operator

(operator instructions)
Jeff Rulis, D.A. Davidson.

Jeff Rulis

Good morning. Okay. Dean, on the margin with what looks like peaking deposit costs, your expectation for further earning asset yield repricing. Wanted to get a sense for the margin expectations. I guess if we net maybe the interest recovery out, how do you see the sort of the second half play out?

Dean Shigemura

Yeah, we expect very modest flat to slightly higher net interest margin in the second half of the year. Looking at our pricing on the asset side, repricing mix of continuing to occur, and that's about $4.5 million to $5 million per quarter. And then on the deposit side, we still see some assets of some deposit remix occurring. But to the extent that will slow down, we would see a better margin improvement. But right now, it looks to be a modest, very modest increase in margin in the second half.

Peter Ho

So just to be clear, Jeff. Against reasonably conservative assumptions on deposit remix and fixed asset cash flow grind forward, we would anticipate NIM to grow a few basis points for a quarter, and I had to pick up that, call it $1 million. There is upside to that to the extent that we can arrest some of the deposit remix. But for now, we're pretty comfortable with kind of where we've set things out and that would be our expectation moving forward.

Jeff Rulis

And are you assuming current expectation on rate cuts or is that in a vacuum? And maybe comment on what rate cuts, what impact that would have if any?

Peter Ho

We do anticipate rate cuts towards the back half of this year and then into next year, the impact of a 25 basis points reduction. For us, as we look at it reasonably conservatively could be a push. And if we get a little more draconian on the deposit repricing, call it down $1 million plus per quarter. So even with a pretty draconian deposit reprice built into rate reductions, Jeff, we still think NII would be maybe down a little bit. And then as that repricing begins to be a more of a tailwind. We get the benefit of that a couple of quarters out.

Jeff Rulis

Appreciate it. Thanks. And maybe, Brad, just a couple of questions on credit. We're coming off a real tiny base, but I guess the increase in nonaccruals and the looks like mostly C&I. Any of and sort of similarities or by industry type there? And then I'll just maybe leave it at that for that first question.

S. Bradley Shairson

No, that's a good observation in that. It's really no loan numbers are coming off such a low number any little movements drive that number a little further either direction that bit of deterioration has just come from a handful of one-off credits, and we're not seeing any negative trends in any particular area. So nothing systemic or broad-based.
And we're actively working with our borrowers and we do see opportunities actually over the next several quarters for some re-financings and upgrades as well.

Jeff Rulis

And Brad, on the again, make it a big deal out of small numbers here, but the year over year office vacancy being down, I guess the better question is just the overall feel of office on Oahu and any kind of detail that you can give if you think that's somewhat of a headache or vacancies being down I guess overall demand on Oahu on the office side would be helpful?

S. Bradley Shairson

So our office portfolio in general is performing really well. Only 2.4% is criticized and our borrowers tend to have strong financial wherewithal, particularly for any of our larger exposures. And the reality of how office space has come down, 1.2 million square feet in just the last five years and the forecast is for another 400,000 square feet to come off in the next three years.
So with that reality, there's a natural repurposing of office space to natural change in supply and demand dynamics where there is demand for multifamily. So we see conversions from office to multifamily and not taking off the office exposure has really played well for the islands of Hawaii. A lot of the office exposure is, of course, in downtown Honolulu, and there have been just such repurposing here downtown. So not seeing any concern here in office space.

Peter Ho

Jeff, it's a pretty stable market. There's not a lot of inflow of demand. And so historically there's not been much building from an office market perspective out here. And as Brad described, what we're seeing kind of for the long term is a trickle trend towards housing office stock, which is helping to drive down supply.

Jeff Rulis

Got you. Okay. So it sounds like a pretty steady demand, but maybe nibbling away at the repurposing of those numbers. Fair enough. Okay. I'll step back. Thank you.

Operator

Andrew Liesch, Piper Sandler.

Andrew Liesch

Hey, good morning, everyone. Loan growth, here on the commercial side was pretty solid. Isn't there anything specific you can point to for C&I or CRE with demand?

Peter Ho

Yeah. You're right. Loan growth was up 0.7% on a linked basis. And headlined by C&I, and it was really kind of a bunch of small stuff, right, Jim. There are nothing in particular, which is a good thing.
And then on the CRE side, kind of similarly And I mean, no megadeals, nothing that really drove the needle from a single credit perspective. So just kind of a good all-around effort.

Andrew Liesch

Kind of how's the pipeline looking here for the next couple of quarters?

S. Bradley Shairson

Yeah. Actually, I think pipeline has grown quite nicely since the beginning of the year. And I think we feel pretty good about opportunities on the commercial side on into Q3 and potentially into Q4 at this point.

Andrew Liesch

Got it. And then on consumer loans, I mean, you still see declines in residential home equity auto. Any reason to think that downward trend won't continue?

Peter Ho

Yeah. So I mean on the on the consumer side, a little bit of a different story. As you can tell from the numbers, I think that resi and home equity is that's going to be rate dependent. And so hopefully, if and as rates come down in that space, it could be at least flattening and hopefully a little bit of an uptick the indirect looks a little bit different. We're seeing a little softness in the marketplace and a good amount of demand or competition, particularly from the the credit union space. So that's been competitively as well as I think, organically a little bit of a tougher situation than previously.
And then finally, on the installment side, a little bit of self-inflicted issues there. I think we probably got a little overly conservative on our underwriting and likely we'll be winding that back a little bit as we step forward. So I'm hoping that we'll get at least a kind of a flat result there.
So you get all of that. Andrew, both commercial and consumer, and we're hopeful to see modest growth in the back half of this year when you combine commercial and consumer, I mean, nothing, nothing that's takes your breath away, but call it mid lower single digit annualized growth for the back half.

Andrew Liesch

Great. That's very encouraging. Good here. Thank you. And then just a housekeeping question on expenses on the FDIC insurance, even if I take out the one-timer for the special assessment, that line was up a little bit.
Is there a new fee rate there, or was it still just a little bit of an outsized quarter?

Dean Shigemura

Yeah, it was a little bit of an outsized quarter, but also what happened was we did get the bill is in arrears. So it's a little bit of a true-up for the first quarter, what's included in the second quarter.

Andrew Liesch

Got it. Okay. That's very helpful and thanks for taking the questions.

Operator

(operator instructions)
Kelly Motta, KBW.

Kelly Motta

Good morning. Thanks for the question. I was hoping to follow up a bit on your fee income outlook for that to grow in the second half of the year. Just wondering where are you seeing good traction on that? Any particular drivers that inform that expectation that we should be keeping in mind?
As the second part, there was a decrease in fees, exchange and other service charges in 2Q, and I think that's usually a seasonally strong quarter. Wondering if there's any puts or takes that line item there. As we think about that?

Dean Shigemura

It mainly based on market conditions and transaction volumes we see it. Slightly better in the second half of the year. And then actually, there were some seasonal revenue in the second quarter, there were some seasonal impacts. Traditionally or historically, the Merchant Services has a very good first quarter. So it did come down slightly in the second quarter. And it kind of offsetting that in the I was on the trust side, we do have a strong tax quarter in the second quarter as well. So those two kind of offset. So going into this the second half, we do see a trend upwards.

Peter Ho

Kelly, we're hoping do hang on to the really strong performance that we're seeing in our wealth businesses. So the trust and private banking teams do a really nice job. We're getting good traction on the broker-dealer side. The exciting thing is we've got a good amount of investment to put into these businesses because we think we can grow them faster than in our more traditional businesses.
So opportunity there we'll see we as you know, we've been a little hamstrung on some of our other fee areas. Mortgage banking, for instance, is pretty much in the doldrums. Swap income has been down the past couple of quarters as CRE transactions just haven't been at the same volume levels as previously.
To the extent that we can get some activity driven off of rate relief, we'll see what happens in that space. So I'd say that we kind of remain reasonably conservative in our view on the fee side. But I would say that could be impacted positively by rate and reduce the volume opportunities.

Kelly Motta

Great. That's super helpful. I was hoping to get as a follow up. Just some color on your preferred rate that happened late in the quarter. I know that really bolstered your Tier one capital and was oversubscribed. Just I believe in that perspective, you cited potentially stronger asset growth. Just wondering how you're viewing, the capital position and the thought process as to raise capital as you did last quarter?

Peter Ho

Well, what we saw was an opportunity in the marketplace after a few regionals came in to step in with the preferred raise, similar to the one that we did just over three years ago now, which was which was highly successful. So from an execution standpoint, we felt very confident that we could be successful in this space in the current environment.
We move forward. I had great execution underwriters did an exceptional job for us. And really the purpose of the raise was to get our capital levels to the levels that we wish to have them at kind of in one fell swoop, if you will, as well as to position us to grow further. And growth has been relatively flat the last four quarters or so. But I think as you can tell by some of the commentary things seem to be looking up from here, and that was really the purpose behind the raise.

Kelly Motta

Great.
Thank you so much for the color. Really quick last one one for me housekeeping item and Dean, can you remind us of the $3 billion of swaps, how much of that is against the loan book?

Dean Shigemura

I guess the loan book is $1.7 billion and in particular, it's against the resi mortgage book.

Kelly Motta

Perfect. Thank you so much.

Peter Ho

Thank you Kelly.

Operator

And at this time, I see no further questions in the queue. I will now -- One moment see, Kelly just three queue. Kelly, your line is now open.

Kelly Motta

Oh, great. Thanks for letting me jump in. I wanted to share the space. But if you could I'm wondering just from a high level, I know the Lahaina bankruptcy or the Lahaina assigning of blame is who's culpable for that fire is coming up. Just wondering if yours could offer your thoughts being much closer on the ground than we are on the developing how that situation is developing?

Peter Ho

Obviously, we're hopeful of a stable and reasonable outcome there, Kelly, but I really don't have any particular insight different from what I think most people are reading in the papers.

Kelly Motta

Great. Thanks.

Operator

Jared Shaw, Barclays.

Jared Shaw

Hey, good afternoon and thanks for the questions. A couple of things just to tap. In the presentation, it looks like there's a $600,000 non-recurring expense called out, but not in the release. What's the any color around what that is and where we should be pulling that from?

Dean Shigemura

Yeah, part of it was the on the FDIC trough that we had in the second quarter, separate from the special assessment and there are a number of other items that also were small and hard to differentiate in the line items, but there are like a couple of hundred thousand dollars here and there that were one-time items, smaller items.

Jared Shaw

Okay. All right. That's good color. Thanks.
And then just going back to your comments around the re-investment rate on the securities and the pickup there. At the same time, we're seeing the securities portfolio running lower. How should we be thinking about the actual use of cash flow from the securities portfolio as you go through the rest of the year, should we -- should we be reinvesting and keeping balances flat, should they be growing or should we expect them to continue to trend lower?

Dean Shigemura

Right now, while in the second quarter, you're right, we did allow it to run off. Looking forward, we do see some opportunities to reinvest some of the cash flow and looking at where rates are trending or could trend looking at possibly some fixed rate investments as well as looking at where on the floating rate side, there's some additional spread. So in general, I would say that we are looking to reinvest some of that cash flow.

Peter Ho

I mean, I think as Fed funds was has been elevated. The transfer into that category has been a pretty easy decision as that number begins or that category begins to decline in yields likely in the coming quarters, we'll be a little more thoughtful in where we place those funds.

Jared Shaw

Okay. Thanks. And then just finally for me on the on the credit again, recognizing that we're talking about smaller numbers here, but what's driving some of the migration in C&I, just given the fact that it does feel like the Hawaii economy is moving along pretty well with visitor spend and visitor levels and employment. What's driving those incrementally weaker C&I trends?

Dean Shigemura

Just kind of one-off types of small loans being dealt with. there's no particular category or or broader trend attached to any of them.

Jared Shaw

So not really an expectation then to see continued growth from here.

Dean Shigemura

I don't think.

Jared Shaw

I said 9 basis points that's very tough. Okay.

Peter Ho

I think the way I'd look at it is because to your point, it's a small numbers, the percentages. I know that if you look at it graphically, it looks like a potential trend. And I'd just be wary of over analyzing and trying to assume that there's a trend there.

Dean Shigemura

You're always going to have activity and when that activity as coffee goes to extremely small number, you're going to get big percentage increase and some changes.

Jared Shaw

Right. Great. That's it for me. Thank you.

Operator

Thank you. And I see no further questions in the queue. I will now turn it back to Chang Park for closing remarks.

Chang Park

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.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.