Bank of Hawaii (BOH) Q1 2024: Deposit Cost Growth Slows to 7bps, Underscoring Franchise Resilience
Deposit cost inflation slowed to its lowest pace since mid-2022, reflecting Bank of Hawaii’s unique market structure and disciplined franchise management. Credit quality and capital remain standout strengths, even as loan growth and margin expansion face headwinds in a higher-for-longer rate environment. Management’s focus on capital preservation and expense control signals caution, with limited visibility for near-term upside until interest rate dynamics shift.
Summary
- Deposit Cost Deceleration: Franchise stability is containing funding pressure, with deposit cost increases at multi-year lows.
- Credit Outperformance: Conservative lending and Hawaii’s constrained real estate supply continue to shield asset quality.
- Capital Strategy on Hold: Shareholder returns favor dividend over buybacks as management awaits regulatory clarity and market normalization.
Business Overview
Bank of Hawaii is a regional bank serving the Hawaiian Islands, Western Pacific, and select U.S. mainland clients. Its business model centers on core deposit gathering and lending, with a loan book comprising 58% consumer (primarily residential mortgages and home equity) and 42% commercial (notably commercial real estate, or CRE). The bank’s competitive advantage lies in its dominant local deposit base and conservative credit underwriting, with 92% of loans in Hawaii. Revenue streams include net interest income from lending and investment portfolios, as well as fee-based non-interest income.
Performance Analysis
Bank of Hawaii’s first quarter results reflected a period of stabilization rather than growth. Net interest income (NII) declined modestly, as asset repricing provided $4.7 million of uplift but was offset by continued, albeit slowing, upward pressure on deposit costs and a slightly smaller balance sheet. The bank’s net interest margin (NIM) contracted by two basis points, a marked improvement from prior quarters, as funding cost growth slowed to its lowest pace since Q2 2022. Operating expenses remained tightly controlled, with normalized expense growth revised down to 1–2% for 2024.
Credit quality remains a defining strength. Net charge-offs and non-performing assets were stable at very low levels, underpinned by Hawaii’s unique real estate dynamics—limited new construction, low vacancy rates, and diversified CRE exposures. The allowance for credit losses increased slightly, maintaining a conservative stance. Deposit balances normalized after temporary Q4 inflows related to Maui fire relief, and the deposit mix shift from non-interest to interest-bearing accounts showed clear signs of deceleration.
- Deposit Cost Management: The seven basis point rise in total deposit cost was the smallest since mid-2022, with spot rates in March only three basis points above the quarter average.
- Loan Growth Plateau: Residential and home equity balances declined slightly, reflecting both consumer caution and a lack of rate relief, while commercial pipelines remain flat.
- Expense Discipline: Core expense growth is now expected to be lower than previous guidance, aided by tight control and limited merit increases.
Overall, BOH’s quarter was defined by prudent risk management and operational stability, but with limited catalysts for near-term earnings acceleration.
Executive Commentary
"Our deposit franchise has also enabled us to deliver total cost of deposits well below industry norms. The increase in total cost of deposits in the quarter of seven basis points is the smallest increase since the second quarter of 2022, helping us to meaningfully improve the trajectory of beta."
Peter Ho, CEO
"We continue to forecast annual cash flows from maturities and paydowns of loans and investments to be $3 billion, which will provide an ongoing supplement to the $7.2 billion in assets, which include our interest rate swaps that reprice annually. As a result of these cash flows repricing our assets higher, our overall asset yields have steadily increased and are expected to continue to increase as new asset yields are well in excess of runoff yields."
Dean Shigemura, CFO
Strategic Positioning
1. Deposit Franchise as Structural Moat
BOH’s deposit base is its core competitive advantage, with 97% of Hawaii’s deposits held by five local banks. This market concentration, combined with long-tenured customer relationships, has insulated the bank from the acute deposit cost volatility seen elsewhere in the U.S. banking sector. The bank’s ability to keep deposit betas low is a direct result of its market structure and relationship banking model.
2. Conservative Credit and Real Estate Exposure
BOH’s lending book is anchored by Hawaii’s unique real estate market, characterized by limited new supply, low vacancy rates, and diversified CRE exposure. The average loan-to-value (LTV) across the portfolio remains below 60%, and tail risk in CRE is minimal, with only 1% of the book above 80% LTV. The office segment, while facing some vacancy, is manageable and partially offset by ongoing office-to-multifamily conversions in Honolulu.
3. Capital Allocation: Cautious Stance
Management is prioritizing capital retention over buybacks, citing regulatory uncertainty and a still-cautious operating environment. Dividends remain the preferred method of shareholder return, with no common stock repurchases in the quarter. The board declared a steady $0.70 per share dividend for Q2 2024, reflecting a conservative approach to capital deployment.
4. Interest Rate Hedging and Asset Repricing
The bank’s hedging program and asset mix shift have increased floating-rate exposure to 45% of assets, up from 27% at the end of 2022. This positions BOH to benefit modestly from higher rates, though the “higher for longer” outlook tempers expectations for margin expansion. Asset cash flows are being reinvested at higher yields, but the incremental benefit is now marginal as deposit costs approach their plateau.
5. Expense Management as Margin Lever
Expense discipline is central to BOH’s margin defense. The bank reduced its 2024 normalized expense growth outlook to 1–2%, with merit increases already factored in. Non-recurring FDIC special assessments remain a near-term headwind, but underlying expense growth is contained.
Key Considerations
The quarter’s results highlight BOH’s defensive posture and structural strengths, but also reveal the constraints imposed by the current macro and rate environment.
Key Considerations:
- Deposit Cost Plateau: Funding cost growth has slowed dramatically, but further relief will require Fed rate cuts or a shift in competitive dynamics.
- Loan Demand Muted: Both consumer and commercial borrowers remain cautious, with loan pipelines flat and residential demand sensitive to rate volatility.
- CRE Risk Contained: Hawaii’s real estate supply constraints and diversified exposures continue to limit downside risk, with minimal tail risk in office and multifamily portfolios.
- Capital Deployment on Hold: Uncertainty around regulatory capital requirements and a cautious market backdrop have paused buybacks in favor of capital accumulation.
Risks
Key risks for BOH include ongoing deposit mix shift if rates stay higher for longer, further margin compression if asset yields plateau, and potential regulatory changes impacting capital requirements or risk-weighted asset calculations. Additionally, while Hawaii’s CRE market is structurally resilient, any unexpected economic shock or sharp decline in tourism could pressure both credit and deposit stability. Management’s conservative stance on capital and expenses reflects these uncertainties, with limited visibility for significant upside until macro conditions change.
Forward Outlook
For Q2 2024, Bank of Hawaii guided to:
- Core non-interest income expected to be slightly lower, reflecting recent market volatility.
- Normalized expense growth of 1–2% for full-year 2024, down from prior guidance.
For full-year 2024, management maintained guidance:
- Annual cash flows from maturities and paydowns of loans and investments expected to remain at $3 billion.
Management highlighted several factors that will shape the outlook:
- Deposit cost growth is expected to remain subdued, but further declines depend on Fed policy.
- Loan and deposit growth are likely to remain flat absent a shift in rate expectations or economic momentum.
Takeaways
BOH’s Q1 2024 results reinforce its position as a defensive, relationship-driven bank with a structural deposit advantage, but also highlight the lack of near-term catalysts in a higher-for-longer environment.
- Deposit Franchise Resilience: The slowing deposit cost growth and stable balances underscore the value of BOH’s local market dominance.
- Credit and Capital Strength: Conservative underwriting and Hawaii’s real estate dynamics continue to limit credit risk and support capital accumulation.
- Watch for Rate and Regulatory Shifts: Forward earnings leverage will hinge on Fed policy, competitive deposit dynamics, and clarity on regulatory capital requirements.
Conclusion
Bank of Hawaii’s quarter was defined by operational steadiness and prudent risk management, with its deposit franchise and credit discipline providing ballast in a challenging rate environment. Until rates ease or regulatory uncertainty abates, upside is likely to be incremental rather than transformational.
Industry Read-Through
BOH’s experience this quarter highlights the resilience that local-market banks with strong deposit franchises can demonstrate in a high-rate environment, especially when paired with conservative credit underwriting and limited exposure to cyclical CRE risk. For regional banks, the slowing of deposit cost growth and stable asset quality offer a playbook for margin defense, but also reveal the sector-wide challenge of reigniting loan growth and expanding NIM without Fed rate cuts. For peers in concentrated or supply-constrained markets, BOH’s approach to capital preservation and expense control provides a template for navigating regulatory and macro uncertainty.