Executive Summary / Key Takeaways

• Bank of Hawaii (NYSE:BOH) is leveraging its strong local market position and disciplined balance sheet management, particularly the repricing of fixed-rate assets and declining deposit costs, to drive consistent net interest income and margin expansion.
• The company reported solid Q1 2025 results with net income up 21% year-over-year, reflecting improved net interest income and controlled noninterest expenses, despite a higher provision for credit losses.
• Credit quality remains pristine, characterized by low net charge-offs (13 bps annualized in Q1 2025) and non-performing assets (12 bps), supported by conservative underwriting and a real estate-secured loan portfolio concentrated in the stable Hawaii market.
• Strategic investments in revenue-enhancing initiatives, particularly in wealth management and digital capabilities, alongside disciplined core expense management, are expected to support future profitability.
• Robust capital levels, significantly bolstered by the 2024 preferred stock offering, and ample contingent liquidity provide a strong foundation for navigating economic uncertainties and positioning for potential future growth.

A Regional Anchor in the Pacific

Bank of Hawaii Corporation, rooted in the islands since 1897, stands as a prominent regional financial institution serving Hawaii, Guam, and other Pacific Islands. Its business model is built on providing a comprehensive suite of financial products and services, encompassing commercial and consumer banking, lending, leasing, deposit services, and wealth management activities like trust, investment management, and brokerage. This long history has cultivated deep, enduring relationships, with approximately 60% of its clients maintaining connections for over a decade, a foundational strength in its strategy.

The company operates within a unique economic landscape. Hawaii's economy, while stable with unemployment at a low 2.9% in March 2025 (below the U.S. rate of 4.2%), faces potential disruptions from shifts in U.S. trade policies, tariffs, and federal spending. The visitor industry, a key economic pillar, is stable but still impacted by events like the Maui wildfires, though markets like Japan are showing signs of recovery. Construction activity, particularly from public and private projects, remains a bright spot, driving employment, albeit with looming concerns about material tariffs and labor availability. The Oahu residential real estate market exhibits stability, marked by modest price increases and tight inventory, supporting the quality of BOH's significant real estate-secured loan portfolio.

In this environment, BOH's strategy balances growth with prudent risk management, aiming for flexibility. It leverages its established brand and market knowledge, holding the number one deposit market share position in Hawaii and leading in deposit market share growth. This market position is a significant competitive advantage against rivals like First Hawaiian Inc. (FHB) and Central Pacific Financial Corp. (CPF), both strong regional players with extensive local networks. While national banks like Wells Fargo & Co. (WFC) also operate in the market, BOH's deep local ties and specialized services, including international client banking and treasury functions, offer differentiation.

Technologically, BOH utilizes various systems to support its operations and manage risk. This includes an asset-liability simulation model to measure interest rate risk sensitivity and the use of derivative instruments for hedging. The company is investing in revenue-enhancing initiatives, specifically mentioning wealth, mobile, and data analytics, indicating a focus on improving digital capabilities and leveraging data. In its competitive landscape, BOH highlights proprietary treasury technology that enables faster foreign exchange processing, targeting future efficiency gains. While specific, quantifiable performance metrics for all its core technologies are not detailed, the strategic intent is clear: to enhance service delivery, manage risk, and improve operational efficiency, particularly in areas like loan processing where it aims for greater efficiency compared to some peers. However, larger national competitors like WFC possess greater scale and potentially more advanced digital processing speeds, posing a challenge that BOH addresses through its localized, relationship-focused approach.

Performance Reflecting Strategic Execution

Bank of Hawaii's financial performance in the first quarter of 2025 demonstrated the positive impact of its strategic focus. Net income rose to $44.0 million, a significant 21% increase compared to $36.4 million in the same period of 2024. This translated to diluted earnings per common share of $0.97, up from $0.87 year-over-year. The return on average common equity improved to 11.8% from 11.2% in Q1 2024.

A key driver of this performance was the continued expansion of net interest income and net interest margin, marking the fourth consecutive quarter of improvement. Net interest income reached $125.8 million in Q1 2025, up from $113.9 million in Q1 2024. The net interest margin expanded to 2.32%, a notable increase from 2.11% a year prior. This improvement stemmed primarily from the repricing of earning assets and lower deposit costs. The company benefited from $553 million in cash flows from fixed or adjustable-rate earning assets in Q1 2025, which were reinvested at higher current market rates. Simultaneously, deposit funding costs decreased, falling 17 basis points linked quarter and 27 basis points since September 2024, as the company actively managed deposit pricing. The headwind from deposit mix shift, where customers move from noninterest-bearing to higher-cost accounts, also slowed significantly, contributing positively to the margin trend.

Noninterest income in Q1 2025 was $44.1 million, a 4% increase from $42.3 million in Q1 2024. This included a $0.6 million charge related to the Visa (V) Class B conversion ratio change. Adjusted for such items, noninterest income was $44.6 million. Growth was seen in areas like trust and asset management income (up 5% year-over-year to $11.7 million, driven by increased assets under management of $12.0 billion as of March 31, 2025) and annuity and insurance income (up 49% to $1.6 million due to higher sales volume).

Operating expenses totaled $110.5 million in Q1 2025, a 4% increase from $105.9 million in Q1 2024. Salaries and benefits increased 8% to $62.9 million, primarily due to higher incentive compensation and medical costs, partially offset by lower share-based compensation and separation expense. FDIC insurance expense decreased significantly by 55% to $1.6 million due to an adjustment of the industry-wide special assessment. Other expenses increased 12%, driven by advertising, broker charges, and workers' compensation claims. Management projects core expenses to increase 2% to 3% from 2024 levels in 2025, including a 1% allocation for strategic revenue-enhancing investments in wealth, mobile, and data analytics.

The balance sheet remained strong. Total assets stood at $23.9 billion as of March 31, 2025, up 1.2% from December 31, 2024. Total loans and leases were $14.1 billion, a 0.3% increase, primarily driven by commercial loan growth (up 1.2% to $6.2 billion, notably a 17.7% increase in construction loans), partially offset by a decrease in consumer loans (down 0.4% to $7.9 billion, mainly in home equity and auto portfolios). The investment securities portfolio grew 2% to $7.4 billion, with purchases of $241.9 million in available-for-sale securities, including $105.8 million in floating-rate securities. Floating-rate securities now represent 17.4% of the portfolio. Net unrealized losses on the investment portfolio decreased to $0.9 billion from $1.1 billion at year-end 2024. Total deposits increased 1.8% to $21.0 billion, with growth across consumer, commercial, and public segments, and a notable increase in regular savings deposits. Deposit costs are expected to continue falling as 74% of time deposits mature in the next six months.

Capital levels are robust, exceeding regulatory well-capitalized thresholds. As of March 31, 2025, the Tier 1 capital ratio was 13.93% and the total capital ratio was 14.97%. The successful $165 million preferred stock offering in June 2024 significantly bolstered capital. The risk-weighted assets to total assets ratio remains low, reflecting the conservative asset mix. Liquidity is ample, with a readily available liquidity to uninsured deposits ratio of 129% at quarter-end, supported by $0.9 billion in cash and equivalents and significant borrowing capacity ($7.5 billion with the Fed, $1.8 billion with the FHLB).

Managing Risks and Looking Ahead

Bank of Hawaii's credit quality remains a significant strength, reflecting its disciplined underwriting and focus on its core markets. As of March 31, 2025, non-performing assets totaled $17.5 million, down from $19.3 million at year-end 2024, representing a low 0.12% of total loans and foreclosed real estate. Net charge-offs, while slightly higher at 13 basis points annualized in Q1 2025 compared to 10 basis points in Q4 2024 and 7 basis points in Q1 2024, were attributed primarily to a single commercial and industrial loan charge-off rather than a systemic trend. Criticized loans decreased to 2.08% of total loans. The allowance for credit losses stood at $147.7 million, or 1.05% of total loans, including a qualitative overlay for economic uncertainty. Management acknowledges a slightly worse outlook for the Hawaii economy in their ACL assumptions but has not changed core qualitative factors, indicating confidence in the portfolio's resilience. The real estate-secured portfolio, particularly CRE with a weighted average LTV of 55% and only 1.9% of loans above 80% LTV, is a key mitigant. While a small subsegment of lodging loans tied to international visitors could see weakness, overall credit metrics remain strong.

Market risk, primarily interest rate risk, is actively managed using simulation models and derivatives. The company uses pay-fixed, receive-floating interest rate swaps ($2.2 billion notional active as of the Q1 2025 call) to manage exposure to changes in fair value of fixed-rate assets. The balance sheet is positioned to benefit from rising rates, but management is also preparing for potential rate cuts, which are expected to have an initial short-term negative impact on NII before becoming a tailwind as deposit costs adjust.

Operational risks, including cybersecurity, are overseen by the Operational Risk Committee. The company relies on internal controls and ongoing reassessment to mitigate these risks. Broader risks include changes in U.S. policy, inflation, climate change, banking industry instability, and competition.

Looking ahead, management anticipates continued modest increases in net interest income and margin, driven by asset repricing and falling deposit costs. Noninterest income is expected to remain stable at $44 million to $45 million per quarter, with potential upside from strategic investments and market improvements. Core expenses are projected to rise 2% to 3% in 2025, reflecting planned investments. Loan growth is expected to be in the low-single-digit range, contingent on market conditions and rate trends. Deposit levels are expected to remain relatively flat as the focus remains on margin over volume. The effective tax rate is projected at 22.5% for the remainder of 2025. Capital is expected to remain strong, providing flexibility, though common share repurchases are paused amidst economic uncertainty.

Conclusion

Bank of Hawaii's first quarter 2025 results underscore a compelling narrative of a regional bank effectively executing its strategy amidst a dynamic economic environment. By capitalizing on the mechanical tailwinds from asset repricing and proactively managing deposit costs, BOH has demonstrated consistent improvement in its core profitability metrics. Its deep-rooted presence and conservative lending practices in the stable Hawaii market continue to yield pristine credit quality, providing a solid foundation against potential economic headwinds.

While facing competitive pressures and the need for ongoing investment in technology and growth initiatives, BOH's strong capital position and ample liquidity provide resilience and strategic optionality. The outlook for continued, albeit modest, financial improvement appears grounded in tangible balance sheet dynamics and disciplined expense management. For investors, the story centers on a stable, well-managed institution leveraging its unique market advantages and balance sheet structure to enhance profitability, making it a noteworthy consideration in the regional banking landscape, particularly as interest rate dynamics continue to evolve. Key factors to monitor include the pace of deposit cost reduction, the execution of loan growth initiatives, and the impact of strategic technology investments on efficiency and revenue generation.