Bank of Hawaii (BOH) Q4 2025: Net Interest Margin Expands to 2.61% as Deposit Mix Tailwinds Persist
Bank of Hawaii’s Q4 delivered its seventh straight quarter of net interest margin expansion, propelled by deposit mix improvements and disciplined asset repricing. Credit quality remains resilient, while management signaled confidence in further margin gains and stepped up capital deployment via increased buybacks. Expense discipline and fee income momentum are emerging watchpoints as the bank positions for mid-single-digit loan growth in 2026.
Summary
- Deposit Mix Shift Drives Margin Expansion: Lower-cost deposit growth and asset repricing continued to lift net interest margin.
- Credit Quality Holds Firm: Asset quality metrics remain strong, with minimal charge-offs and stable delinquencies.
- Capital Return Accelerates: Management plans to increase share repurchases amid stable capital and tepid loan growth.
Performance Analysis
Bank of Hawaii’s core profitability improved in Q4, with net income and EPS advancing on the back of a 15 basis point sequential increase in net interest margin (NIM) to 2.61%. This marks the seventh consecutive quarter of NIM expansion, a trend powered by both deposit cost improvement and strategic asset repricing. Notably, non-interest-bearing demand deposits (NIBD) grew 6.6% sequentially, reflecting effective deposit gathering in a competitive environment. Linked quarter loan and deposit balances both edged higher, but management characterized the NIBD surge as outsized and partly seasonal, cautioning that future growth is likely to moderate.
Credit quality remains a standout, with non-performing assets declining and net charge-offs staying low. Commercial real estate (CRE) exposure is diversified, with conservative loan-to-value (LTV) ratios and a majority of maturities extending beyond 2030, mitigating near-term refinancing risk. Non-interest income was essentially flat after normalizing for one-off items, while expense trends were slightly higher than forecast due to incentive accruals. The bank’s capital ratios remain robust, supporting a resumed and now accelerated share repurchase program.
- Deposit Cost Reduction: Interest-bearing deposit costs fell 16 basis points quarter-over-quarter, supporting NIM gains.
- Loan Book Stability: Consumer loans make up 57% of the portfolio, with 86% of that in residential mortgages and home equity, underpinned by high FICO scores.
- Expense Watchpoint: Non-interest expense came in above previous forecasts, driven by higher incentive accruals.
With NIM closing the year at 2.67% in December and management targeting a 2.90% exit rate for 2026, the bank’s earnings power is poised for further expansion—contingent on sustaining favorable deposit dynamics and disciplined expense management.
Executive Commentary
"Our market leading brand position is largely the driver of our market share outperformance, giving us both a robust and durable competitive franchise advantage."
Peter Ho, Chairman and CEO
"This is the first time since the second quarter of 2022 after the Fed started raising rates that the mixed shift had a positive impact on our earnings."
Brad Sattenberg, Chief Financial Officer
Strategic Positioning
1. Deposit Franchise and Market Share Strength
Bank of Hawaii’s dominant deposit market share—built on a 125-year local presence and a robust branch and digital network—remains a strategic moat. Over the past two decades, the bank’s market share growth has outpaced competitors by nearly 4x, and management sees no near-term ceiling to continued share gains. The focus on growing low-cost, sticky deposits is paying off, with NIBD growth and improved deposit betas (deposit beta, the proportion of rate changes passed to depositors) supporting both margin and franchise value.
2. Asset Repricing and Margin Expansion
Active management of asset yields—via loan and securities portfolio repricing—has been a central lever in expanding NIM, with the benefit expected to persist into 2027. In Q4, $659 million of fixed-rate loans and investments were repositioned at higher yields, and further asset repricing is anticipated as legacy assets mature. Management expects fixed asset repricing and deposit remix to continue to drive NIM higher, relatively insulated from near-term Fed moves.
3. Fortress Credit Profile and Risk Management
The loan book is anchored in Hawaii and the Western Pacific, with a 60%+ client tenure and conservative underwriting. CRE exposure is diversified by property type and geography, with a low average LTV and no single property type exceeding 8.5% of total loans. The allowance for credit losses (ACL) coverage ratio dipped slightly, reflecting improved macro outlooks rather than any deterioration in underlying credit. Management emphasized that recent charge-offs were idiosyncratic, not systemic.
4. Fee Income and Wealth Management Opportunity
Non-interest income is stable, but management is investing in wealth management as a future growth vector. Internal momentum, client engagement, and pipeline development are beginning to translate into higher fee production. Leadership is targeting double-digit fee growth as these efforts scale, with Q4 showing over 2% sequential growth in wealth-related fees.
5. Capital Allocation and Share Repurchases
With capital ratios well above regulatory minimums and loan growth expected to remain in the low- to mid-single digits, management is increasing share repurchases. Q4 saw $5 million in buybacks, with a stated intent to raise this to $15-20 million per quarter, reflecting confidence in capital strength and valuation.
Key Considerations
This quarter’s results highlight Bank of Hawaii’s ability to harness local market dominance, optimize its balance sheet, and maintain credit discipline in a stable but competitive environment.
Key Considerations:
- Deposit Franchise Leverage: Sustained growth in non-interest-bearing deposits is a core earnings engine, but future growth rates may moderate from Q4’s seasonal high.
- Margin Upside from Asset Repricing: Mechanical repricing of legacy assets at higher rates will continue to benefit NIM through 2027, supporting earnings visibility.
- Expense Trajectory: Normalized non-interest expense is forecast to rise 3-3.5% in 2026, with Q1 typically elevated due to payroll and incentives—expense control will be critical to operating leverage.
- Fee Income Scalability: Wealth management initiatives are gaining traction, but the pace and sustainability of fee growth remain to be proven at scale.
- Capital Deployment Flexibility: With robust capital ratios and modest loan growth, the bank is positioned to return more capital through buybacks.
Risks
Key risks include the potential for slower-than-expected deposit growth or remix, expense drift above guidance, and any deterioration in Hawaii’s economic outlook that could impact credit metrics. While CRE concentration is managed conservatively, sector-wide stress could still pose challenges. Fee income growth is still nascent and could underdeliver if wealth initiatives stall or client activity softens. Regulatory changes or macro shocks remain ongoing watchpoints.
Forward Outlook
For Q1 2026, Bank of Hawaii guided to:
- Normalized non-interest income of $42-43 million
- Normalized non-interest expense of approximately $113 million
For full-year 2026, management maintained:
- Expense growth of 3-3.5% over 2025 normalized levels
- Net interest margin exiting the year near 2.90%
Management highlighted several factors that will shape results:
- Continuation of asset repricing tailwinds and deposit cost discipline
- Potential for mid-single-digit loan growth as pipelines improve
Takeaways
Bank of Hawaii’s Q4 reinforces its position as a margin leader among regional banks, leveraging local franchise strength and balance sheet agility.
- Margin Expansion Engine: Mechanical asset repricing and improved deposit mix are driving NIM gains, with more upside expected in 2026.
- Credit and Capital Strength: Pristine credit quality and surplus capital enable both defensive resilience and increased capital return.
- Growth Watchpoints: Investors should monitor expense discipline, fee income scalability, and the sustainability of deposit growth as key drivers of future earnings power.
Conclusion
Bank of Hawaii’s Q4 results showcase a well-executed balance sheet strategy and fortress credit profile, with clear signals of continued NIM expansion and capital return acceleration. The bank’s ability to sustain its deposit franchise advantage and execute on fee growth initiatives will be pivotal to maintaining its earnings trajectory in a competitive landscape.
Industry Read-Through
BOH’s performance underscores the value of local deposit franchise strength and disciplined asset-liability management in the current rate environment. Regional peers with strong core deposit bases and conservative credit cultures are best positioned to benefit from ongoing asset repricing, while those with higher funding costs or CRE concentration risk may lag. The quarter also highlights the growing importance of wealth management as a fee income lever for community banks, though scaling such initiatives remains a multi-year effort. The industry should expect continued divergence between banks able to drive margin expansion through deposit and asset mix and those more exposed to funding pressure or credit volatility.