Executive Summary / Key Takeaways

• Entrenched Market Leadership: Bank of Hawaii leverages its dominant market share and strong brand in the unique Hawaiian and Pacific Islands banking landscape, enabling attractive deposit pricing and a resilient funding base.
• Consistent Margin Expansion: The company has achieved five consecutive quarters of Net Interest Margin (NIM) and Net Interest Income (NII) expansion, driven by the favorable repricing of fixed-rate assets and a significant moderation in deposit remix. Management targets a 2.50% NIM.
• Pristine Credit Quality & Robust Capital: BOH maintains exceptionally strong asset quality with low net charge-offs and nonperforming assets, coupled with healthy capital ratios well above regulatory thresholds, providing a strong buffer against economic uncertainties.
• Strategic Digital & Wealth Investments: Beyond traditional banking, BOH is actively investing in revenue-enhancing initiatives in mobile, data analytics, and wealth management, aiming to drive future growth and enhance operational efficiency.
• Cautious Capital Deployment: While capital levels are robust, management is taking a disciplined approach to share repurchases, prioritizing clarity on the economic and interest rate environment before resuming significant buybacks.

The Pacific Anchor: A Unique Banking Franchise

Bank of Hawaii Corporation, founded in 1897, has cultivated a deeply entrenched position within the unique banking landscape of Hawaii, Guam, and other Pacific Islands. This long history has fostered enduring relationships, with approximately 60% of both commercial and consumer clients having partnered with the bank for over a decade. This commitment to local markets and long-standing relationships has allowed BOH to build a "fortress market position," leveraging a "best-in-market brand" that translates into attractive deposit pricing and a stable funding base. Indeed, BOH consistently leads in deposit market share growth, a testament to its strong regional presence.

The Hawaiian economy, BOH's primary operating environment, continues to demonstrate resilience. In June 2025, Hawaii's unemployment rate stood at 2.8%, notably outperforming the broader U.S. rate of 4.1%. The vital tourism sector remains solid, with visitor expenditures up 6.5% year-to-date and arrivals increasing by 2.8% through May, primarily driven by the U.S. continental market. While construction has been a "relative bright spot," management notes potential headwinds from tariffs on imported materials and labor, which could cause construction employment to recede. Residential real estate on Oahu remains stable, with single-family home prices modestly rising and condominium prices slightly down year-to-date. Commercial real estate also benefits from consistently low vacancy rates and flat inventory levels, supporting a stable market.

BOH's strategic approach is balanced between growth and prudent risk management, emphasizing flexibility to adapt to economic shifts. A key component of this strategy involves continuous investment in its operational capabilities and customer-facing platforms. The company is actively allocating resources to "revenue-enhancing initiatives" in wealth management, mobile banking, and data analytics. These investments, including the recent amortization of its online banking platform, aim to enhance customer experience, streamline operations, and drive future revenue streams. While larger national banks like Wells Fargo (WFC) and Bank of America (BAC) possess greater scale and broader technological capabilities, BOH's focused digital investments are designed to deepen its competitive moat by improving efficiency and service delivery within its specific regional markets, allowing it to compete effectively against both national players and regional peers like First Hawaiian Bank (FHB) and Central Pacific Financial Corp. (CPF).

Financial Momentum: Margin Expansion and Disciplined Growth

Bank of Hawaii has delivered a compelling financial narrative, marked by five consecutive quarters of expanding Net Interest Income (NII) and Net Interest Margin (NIM). In the second quarter of 2025, net income reached $47.6 million, a substantial 39.8% increase year-over-year, translating to diluted earnings per common share of $1.06, up 31% from the prior year. Net interest income grew to $129.7 million, a 13% increase from the same period last year, with the net interest margin expanding by 24 basis points to 2.39%. This consistent improvement is a direct result of BOH's disciplined asset/liability management strategy.

A primary driver of this expansion is the favorable repricing of fixed-rate assets. In Q2 2025, $572 million in fixed/variable assets cash flowed off at a 4% roll-off rate and were reinvested at a significantly higher 6.3% roll-on rate. This mechanical process, where lower-yielding assets are replaced with higher-yielding ones, is expected to continue contributing positively to NII. Concurrently, the headwind from deposit remix, where customers shift from noninterest-bearing or low-yielding accounts to higher-cost deposits, has moderated considerably. In Q2 2025, this mix shift amounted to $59 million, resulting in a modest $0.5 million negative impact on NII, a stark improvement from the $448 million shift observed in Q2 2024. The cost of deposits remained stable at 160 basis points quarter-over-quarter and declined by 21 basis points year-over-year, with management anticipating the deposit beta to move towards 35% as a large portion of Certificates of Deposit (CDs) mature at higher rates (over 51% in the next three months at an average rate of 3.61%).

While total loans and leases saw a slight decrease of 0.5% from December 2024 to June 2025, driven by paydowns in commercial and industrial loans and a slowdown in consumer automobile loan production, construction loans increased by 21.3%. Management expressed some disappointment with the commercial book's performance in Q2, but commercial pipelines are building, and a modest level of growth is anticipated for the remainder of the year. Total deposits, however, increased by 0.8% to $20.8 billion, with significant growth in public and other deposits.

Noninterest income in Q2 2025 reached $44.8 million, benefiting from an $0.8 million gain related to a Bank-Owned Life Insurance (BOLI) recovery. Despite some fluctuations from customer derivative activity, the Trust and Asset Management segment continues to be a positive contributor. Noninterest expense was well-controlled at $110.8 million, with a notable decrease in FDIC insurance expense due to a prior-year special assessment. Management forecasts noninterest income to be between $44 million and $45 million for the rest of the year, while overall noninterest expense is projected to increase by a modest 2% to 3% from normalized 2024 levels, reflecting ongoing expense discipline and strategic investments. The effective tax rate is expected to be between 21% and 22% for the full year, driven by discrete tax items and increased tax-exempt investment income.

Resilient Credit and Strategic Capital Management

Bank of Hawaii's credit quality remains a cornerstone of its investment thesis, consistently demonstrating strength amidst various economic conditions. Net charge-offs in Q2 2025 were a mere $2.6 million, annualized at 7 basis points, a decrease from prior periods. Nonperforming assets (NPAs) stood at $17.9 million, representing a low 13 basis points of total loans and leases and foreclosed real estate. The Allowance for Credit Losses (ACL) remained stable at 1.06% of total loans and leases outstanding. This robust asset quality is underpinned by a conservative lending philosophy, with 93% of the loan portfolio concentrated in Hawaii and the Western Pacific, and a significant portion secured by real estate with low loan-to-value (LTV) ratios (48% for consumer, 55% for commercial). The commercial real estate (CRE) portfolio, in particular, exhibits limited tail risk, with only 1.3% of CRE loans having an LTV greater than 80%. Even the direct exposure to U.S. tariffs is minimal, impacting only 4% of the loan portfolio, or $640 million, given Hawaii's service-oriented economy.

The company maintains a strong liquidity position and robust capital levels, providing significant financial flexibility. As of Q2 2025, Tier 1 capital and total risk-based capital ratios improved to 14.2% and 15.2%, respectively, comfortably exceeding well-capitalized regulatory thresholds. Total shareholders' equity increased by 4.5% from December 2024 to $1.70 billion. BOH has substantial contingent liquidity, including $7.60 billion in borrowing capacity with the Federal Reserve Discount Window and $1.80 billion with the FHLB. The ratio of readily available liquidity to adjusted uninsured deposits improved to 132.00, highlighting the company's strong funding profile.

BOH actively manages its interest rate risk through a hedging program, primarily utilizing pay-fixed interest rate swaps to synthetically adjust the duration of its earning assets. As of Q2 2025, the company had $2.2 billion of active swaps and $600 million of forward-starting swaps, strategically positioning its balance sheet for various rate environments. Despite a portion of its investment securities being in an unrealized loss position, management is confident in its liquidity access to avoid forced liquidation.

From a capital allocation perspective, BOH is exercising prudence. While the company has a standing share repurchase program with $126.0 million remaining authority, no shares were repurchased in Q2 2025. Management intends to maintain a "hold position" on buybacks, awaiting "cleaner line-of-sight into credit, the economy and rates" given the current "heightened variability" in these factors. This conservative stance underscores a commitment to capital preservation and flexibility in an uncertain macroeconomic climate, even as capital ratios are expected to continue building through retained earnings.

Conclusion

Bank of Hawaii Corporation stands as a compelling investment case, anchored by its unique and dominant position in the Hawaiian and Pacific Islands banking markets. The company's disciplined strategy, characterized by attractive deposit pricing, methodical asset repricing, and a moderating deposit remix, has consistently driven Net Interest Income and Net Interest Margin expansion. With a clear target of achieving a 2.50% NIM, BOH demonstrates a strong trajectory for profitability growth.

The company's exceptional credit quality, reflected in low net charge-offs and robust capital ratios, provides a significant competitive advantage and a resilient foundation against potential economic headwinds, including the nuanced impacts of tariffs on the local economy. Furthermore, BOH's strategic investments in digital platforms and wealth management initiatives underscore its commitment to long-term growth and operational efficiency, positioning it to enhance customer experience and capture new revenue streams. While management maintains a cautious stance on share repurchases, prioritizing capital flexibility in an uncertain environment, the underlying strength of its core franchise, combined with its disciplined financial management and strategic foresight, suggests a continued path of stable and accretive performance for investors.