Bank of Hawaii (BOH) Q1 2025: Deposit Costs Fall 10bps, Margin Expansion Momentum Builds
Deposit funding costs declined for the first time this rate cycle, driving margin expansion and signaling a potential inflection in Bank of Hawaii’s earnings power. Management’s disciplined balance sheet repositioning and stability in credit metrics set the stage for incremental NII growth, with commercial loan pipelines and wealth initiatives providing additional upside levers. Investors should watch for further margin gains as deposit repricing and asset turnover compound through 2025.
Summary
- Deposit Cost Inflection: Funding costs decreased for the first time this cycle, supporting margin recovery.
- Commercial Loan Momentum: Strongest commercial production since 2002 points to sustained lending activity.
- Wealth Platform Upside: Strategic investment in wealth and trust is emerging as a new earnings driver.
Performance Analysis
Bank of Hawaii delivered a quarter marked by net interest margin (NIM) expansion and disciplined cost control, with NIM rising to 2.19% and improving further to 2.26% in December. Deposit funding costs fell by 10 basis points sequentially, a notable first since rates began rising, as the bank benefited from both lower deposit rates and a slowing remix from non-interest-bearing to interest-bearing balances. Average deposits and loans grew modestly, up 1.3% and 1.1% respectively, with commercial lending driving the increase.
Credit quality remains a bedrock strength, as net charge-offs and criticized assets both declined, and the loan book continues to be anchored by long-standing relationships and conservative underwriting. Non-interest income, excluding a Visa-related adjustment, was stable, while expenses were well managed despite a temporary uptick in medical costs. Capital ratios remain robust, with no share repurchases as management prioritizes capital preservation amid macro uncertainty.
- Margin Expansion Lead-in: Net interest margin rose for the third straight quarter, supported by deposit cost declines and asset repricing.
- Commercial Lending Strength: Commercial production hit a multi-decade high, with diversified CNI and CRE originations to core clients.
- Expense Discipline: Core expenses rose just 1.7% year over year, with tight control outside of one-time health cost increases.
Deposit growth, a key NII lever, showed signs of stabilization, and management expects further margin tailwinds as time deposits reprice lower in coming quarters. Non-interest income is guided to rise, supported by trust and merchant services as the wealth platform scales.
Executive Commentary
"Deposit funding costs fell for the first time this rate cycle on both an interest-bearing and total deposit cost basis. Economic conditions remain stable in Hawaii. Unemployment remains well below the national average."
Peter Ho, Chairman and CEO
"We expanded our net interest income and net interest margin for the third consecutive quarter. Net interest income for the fourth quarter was $120.2 million, an increase of $2.6 million, or 2.2%, from the previous quarter, and net interest margin expanded to 2.19%."
Dean Shigemura, CFO
Strategic Positioning
1. Deposit Cost Management and Margin Recovery
BOH’s ability to reduce deposit funding costs marks a turning point in its margin trajectory, as 71% of time deposits are set to reprice within six months. Management’s proactive lowering of deposit rates positions the bank to capture further margin upside as legacy higher-cost CDs mature and roll off. The slow pace of non-interest-bearing deposit runoff also lessens NII pressure from remixing.
2. Commercial Lending and Relationship Banking
Commercial lending pipelines remain robust, with Q4 marking the strongest production since 2002 and a healthy mix of CNI (commercial and industrial) and CRE (commercial real estate) loans. The portfolio is diversified, with no CRE sector exceeding 7% of total loans, and long-standing client relationships (60% over 10 years) anchor credit quality. Ongoing loan growth is expected to be a mid-single-digit driver for 2025.
3. Wealth and Trust Platform Build-Out
BOH is strategically investing in its wealth and trust businesses, targeting market-scale capabilities to rival its consumer and commercial units. Trust and brokerage revenues grew over 9% year over year, and management signaled “interesting things planned for 2025” to further accelerate growth. This diversification aims to boost fee income and deepen client relationships, especially as transaction volumes rise.
4. Balance Sheet Repositioning and Hedging
Active balance sheet management is central to BOH’s rate strategy, with fixed-rate asset exposure reduced to 57% (from 73% in 2022) and $800 million in swaps repositioned to lower fixed rates. The bank is positioned to benefit from both rising and falling rates, with forward-starting swaps and floating-rate securities adding flexibility and incremental income.
5. Conservative Capital and Risk Appetite
Capital ratios remain well above regulatory minimums, and management is holding off on share buybacks until there is greater clarity on credit, rates, and the economy. The focus is on organic capital build through retained earnings, reflecting a cautious posture in a still-volatile macro environment.
Key Considerations
BOH’s quarter underscores a disciplined, relationship-driven model with embedded margin and fee income upside, but the bank’s future trajectory will hinge on execution and external conditions.
Key Considerations:
- Deposit Repricing Leverage: Majority of time deposits maturing in the next year will lower funding costs and support margin growth.
- Commercial Lending Pipeline: Continued strength in CNI and CRE origination is critical for sustaining loan and NII growth.
- Wealth Expansion Execution: Delivery on wealth and trust initiatives will determine success in diversifying revenue streams.
- Expense Control Vigilance: Maintaining low expense growth, especially as revenue initiatives scale, will be key for operating leverage.
- Macro Stability Reliance: Relative economic stability in Hawaii is a tailwind, but exposure to tourism and real estate cycles remains a risk.
Risks
Key risks include potential deposit outflows if competitive pressures rise, macro shocks that could impact Hawaii’s tourism and real estate markets, and execution risk in scaling wealth management. Management’s cautious stance on buybacks and capital deployment reflects uncertainty around credit, rates, and the broader economy. Any material deterioration in credit quality or a reversal in deposit trends would challenge the current margin expansion narrative.
Forward Outlook
For Q2 2025, BOH guided to:
- Further NIM expansion as deposit repricing and asset turnover continue to benefit net interest income.
- Non-interest income in the $44 to $45 million range, driven by trust and merchant services.
For full-year 2025, management projects:
- Core expense growth of 1% to 2%, with an additional 1% allocated to revenue-enhancing initiatives.
Management emphasized the compounding benefit of asset and deposit repricing, the importance of commercial loan pipelines, and the incremental margin tailwind from time deposit maturities.
- Margin trajectory will depend on continued deposit cost reductions and robust commercial lending.
- Wealth platform investments are expected to show more tangible results in the second half.
Takeaways
BOH’s margin expansion and cost discipline position the bank for incremental earnings growth, but success will depend on deposit retention, commercial lending execution, and wealth platform scaling.
- Deposit Cost Decline: Funding cost reduction is a structural tailwind for margin and NII, with more benefit to come as CDs reprice.
- Commercial Lending Upside: Sustained pipeline activity in CNI and CRE is a key lever for both growth and credit quality stability.
- Wealth and Fee Income Diversification: Execution on wealth initiatives will be pivotal for expanding non-interest income and deepening client wallet share.
Conclusion
Bank of Hawaii’s disciplined approach to deposit pricing, robust credit profile, and strategic investments in commercial and wealth businesses have set the stage for continued margin and earnings momentum. The bank’s ability to compound these gains through 2025 will depend on operational execution and the resilience of Hawaii’s unique economic base.
Industry Read-Through
BOH’s margin recovery and deposit cost inflection offer a read-through for regional banks facing similar funding pressures. The ability to slow deposit remix and actively reprice time deposits is emerging as a differentiator for margin trajectory. Commercial lending strength in core markets, coupled with prudent credit underwriting, is critical for stability amid macro uncertainty. Banks with scalable wealth and trust platforms are positioned for more resilient fee income, while those with concentrated real estate or tourism exposure must remain vigilant to local shocks. The sector’s focus is shifting from NIM defense to incremental margin recapture as the rate cycle turns.