Executive Summary / Key Takeaways

• Dominant Regional Franchise with Expanding Margins: Bank of Hawaii Corporation ($BOH) leverages its market-leading position in Hawaii and the Pacific Islands to consistently expand its net interest margin (NIM), which reached 2.46% in Q3 2025, marking the sixth consecutive quarter of expansion. Management anticipates further NIM growth, potentially reaching 2.50% by Q4 2025, driven by fixed-asset repricing and effective deposit cost management.
• Pristine Credit Quality and Robust Capital: The company maintains a "fortress credit position" with exceptionally low net charge-offs (0.07% annualized in Q3 2025) and non-performing assets (0.12% of total loans and foreclosed real estate). Capital ratios remain strong and well above regulatory thresholds, providing financial flexibility.
• Strategic Initiatives for Growth and Efficiency: BOH is actively pursuing growth in wealth management through its new "Banco Advisors" platform, a partnership with Saterra, aiming to enhance technology and client experience. Recent balance sheet repositioning, including interest rate swap adjustments and AFS securities sales, is designed to optimize net interest income and pre-tax earnings.
• Resilient Local Economy and Balanced Loan Portfolio: Hawaii's economy demonstrates resilience with low unemployment and stable real estate markets, providing a solid foundation for BOH's predominantly secured and diversified loan portfolio. Commercial and consumer loan growth is projected in the low single digits, with potential upside from economic clarity.
• Disciplined Expense Management and Shareholder Returns: Despite strategic investments, BOH maintains a disciplined approach to expenses, forecasting a modest increase for 2025. The company is also signaling a potential return to share repurchases, alongside a consistent common stock dividend, reflecting confidence in its financial outlook and commitment to shareholder value.

A Regional Powerhouse Forges Ahead with Strategic Precision

Bank of Hawaii Corporation, a venerable institution founded in 1897, stands as a cornerstone of financial services across Hawaii, Guam, and other Pacific Islands. The company's enduring strategy centers on harnessing its unique market knowledge, disciplined management, and formidable brand strength to deliver superior risk-adjusted returns. This approach has cemented its position as a dominant regional player, consistently outperforming competitors in deposit market share growth. Since February 2005, Bank of Hawaii has expanded its deposit market share in Hawaii by 600 basis points, a testament to its unwavering commitment to the marketplace and consistent strategic execution.

The Hawaiian economy, BOH's primary operating ground, continues to exhibit resilience despite broader global uncertainties. As of August 2025, Hawaii's unemployment rate stood at 2.70%, significantly below the U.S. national rate of 4.30%. The real estate market on Oahu, the state's largest, remains stable, with single-family home prices increasing by 4.10% and condominium sales decreasing by 1% for the first nine months of 2025 compared to the same period in 2024. Visitor expenditures were up 6.5% year-to-date through May 2025, driven by the U.S. continental market. This stable economic backdrop provides a robust foundation for BOH's operations.

Competitive Dynamics and Market Leadership

Bank of Hawaii operates within a concentrated regional banking market, primarily competing with other Hawaii-based institutions like First Hawaiian Bank (FHB) and Central Pacific Financial Corp. (CPF), as well as larger national players such as Bank of America (BAC) which has a presence in the islands. BOH's competitive advantage is deeply rooted in its strong regional brand and extensive local market expertise. This translates into superior customer loyalty and recurring revenue streams from deposits and loans, fostering pricing power in its services. The company's long history and local ties enable it to offer tailored financial solutions, differentiating it from FHB's often broader, more standardized offerings.

While BOH excels in customer intimacy and regulatory familiarity within Hawaii, it acknowledges potential vulnerabilities in technological agility compared to larger, more digitally advanced competitors like BAC. BAC, with its vast resources and advanced digital platforms, often leads in innovation speed and product breadth. However, BOH strategically counters this by focusing on niche opportunities and leveraging its deep understanding of the local market to provide personalized services. The company's operational execution is strong in its regional markets, but it faces the ongoing challenge of adapting to the rapid digital advancements seen across the broader banking industry. BOH's financial performance, characterized by stable profitability and cash flow, compares favorably to FHB and CPF in terms of consistency, though it may exhibit different growth dynamics due to its focused regional strategy.

Operational Excellence and Strategic Evolution

BOH's business model is diversified across three segments: Consumer Banking, Commercial Banking, and Treasury and Other. Each plays a critical role in the company's overall performance and strategic objectives.

Consumer Banking
The Consumer Banking segment provides a broad array of services, including residential mortgages, home equity lines, auto loans, and deposit accounts, delivered through 51 branches and 322 ATMs across Hawaii and the West Pacific. For the nine months ended September 30, 2025, this segment reported net income of $89.11 million, an 8.22% decrease from the same period in 2024. This decline was primarily attributed to a 2.12% decrease in net interest income, driven by lower deposit spreads on higher deposit balances, and a 2.31% increase in noninterest expense due to higher salaries and benefits and mobile/online banking platform costs. Despite these pressures, noninterest income for the segment saw a modest 1.58% increase, bolstered by trust and asset management income and service fees.

A significant strategic initiative in Consumer Banking is the enhanced focus on wealth management. Management views this as a substantial opportunity, particularly given Hawaii's affluent marketplace and the fragmented nature of the local wealth segment. In Q3 2025, BOH partnered with Saterra to modernize its broker-dealer platform, launching "Banco Advisors." This new platform is designed to offer "meaningful technology, client experience, and investment product enhancements" to both clients and prospective advisors. The company is also investing in talent and fostering stronger coordination between its commercial and wealth teams to capitalize on cross-marketing opportunities, especially within the small and medium-sized enterprise (SME) segment.

Commercial Banking
The Commercial Banking segment serves middle-market and large companies, as well as government entities, offering commercial loans, real estate financing, and cash management services. This segment demonstrated robust growth, with net income increasing by 8.76% to $95.47 million for the nine months ended September 30, 2025, compared to the prior year. This performance was largely driven by a 7.05% increase in net interest income, stemming from higher commercial mortgage loan balances and improved allocated interest income from deposits. Noninterest income also grew by 10.20%, benefiting from customer derivative program revenue, merchant revenue, and loan fees.

The commercial loan portfolio, totaling $6.10 billion, represents 43% of total loans and is predominantly real estate secured (73%) with a conservative weighted-average loan-to-value (LTV) of 55%. The commercial real estate (CRE) portfolio, at $4.04 billion, is well-diversified across property types, with no single sector exceeding 7% of total loans, and boasts low average loan sizes. Over half of these loans mature in 2030 or later, mitigating near-term refinancing risks. BOH also highlights its limited exposure to non-depository financial institutions and EFIs, totaling only 0.6% of total loans ($85 million), with the majority ($74 million) to publicly traded equity REITs. Management has expressed confidence in the stability of its office portfolio, noting no issues with renewals.

Treasury and Other
The Treasury and Other segment manages corporate asset and liability activities, including interest rate risk and foreign currency exchange. For the nine months ended September 30, 2025, the net loss in this segment decreased significantly by 46.49% to $39.61 million. This improvement was primarily due to a 70% decrease in net interest expense, reflecting lower funding costs and higher interest income from increased asset yields. Noninterest income also increased by 19%, driven by other income and bank-owned life insurance income.

Technological Differentiators and Innovation

Bank of Hawaii's strategic investments in technology are foundational to its competitive positioning and future growth. While not a technology company in the traditional sense, BOH leverages digital platforms to enhance customer experience, improve operational efficiency, and expand its service offerings.

A core technological differentiator lies in its online banking platform and debit card transaction capabilities. The company reported an 18.90% increase in data processing fees in Q3 2025, and a 14.80% increase for the first nine months of 2025, "primarily due to an increase in data service fees, our online banking platform, and an increase in debit card transactions." This indicates active usage and ongoing investment in these digital channels, which are crucial for customer engagement and transaction volume in the modern banking landscape. The tangible benefit is improved customer convenience and a broader reach for services, contributing to deposit growth and fee income.

A significant new technological development is the modernization of its broker-dealer platform through the partnership with Saterra, leading to the launch of "Banco Advisors." This initiative aims to provide "meaningful technology, client experience, and investment product enhancements over its predecessor operation." The stated goal is to "delight both clients and prospective advisers alike," suggesting a focus on user-friendly interfaces, advanced analytical tools for advisors, and a wider array of investment products. For investors, this technological upgrade is critical as it directly supports BOH's strategic push into wealth management, a segment where its asset under management (AUM) growth has historically lagged. By enhancing its platform, BOH aims to capture a larger share of Hawaii's affluent market, thereby diversifying revenue streams and improving fee-based income, which contributes to overall profitability and a stronger competitive moat against both regional and national players.

Furthermore, BOH's ongoing investment in mobile banking and data analytics is part of its broader strategy to enhance revenue. While specific quantitative targets for these initiatives are not publicly detailed, the strategic intent is clear: to improve customer experience, optimize service delivery, and identify new growth opportunities. These technological advancements are expected to be "accretive to the earnings stream," contributing to BOH's long-term growth strategy by fostering efficiency and expanding its digital footprint.

Financial Performance and Health

Bank of Hawaii delivered strong financial results for the third quarter of 2025, underscoring its operational effectiveness and strategic execution. Net income for the quarter was $53.35 million, a substantial 32.2% increase from the same period in 2024. Diluted earnings per common share rose to $1.20, up 29% year-over-year. The return on average common equity improved to 13.59% for the quarter.

Net interest income (NII) for Q3 2025 was $136.68 million, a 16% increase compared to the prior year. This growth was accompanied by a significant expansion in the net interest margin (NIM), which reached 2.46%, up 28 basis points from Q3 2024. The expansion in NII and NIM was primarily driven by the repricing of fixed-rate assets, which contributed $3.3 million to NII in Q3 2025, and the successful repricing of the company's Certificate of Deposit (CD) book. In Q3 2025, BOH remixed $594 million in fixed-rate loans and investments, rolling off at 4.1% and rolling on at 6.3%, further boosting NIM. The cost of interest-bearing liabilities declined by two basis points, with the spot rate on deposits at 154 basis points, five basis points lower than the average for the period.

Noninterest income for Q3 2025 was $45.97 million, a 1.9% increase year-over-year. Adjusting for a $0.78 million charge related to a Visa (V) B conversion ratio change and a prior-quarter BOLI recovery, non-interest income increased by $2.8 million, primarily due to higher customer derivative activity, trust and asset management earnings, and elevated loan fees. Noninterest expense increased by 9.3% to $112.39 million in Q3 2025, influenced by higher base salaries, separation expenses, and data processing fees, partially offset by lower professional fees and a partial recovery of the FDIC special assessment.

The balance sheet remained stable, with total assets at $24.01 billion as of September 30, 2025. Total loans and leases were $14.02 billion, a modest 0.4% decrease from December 31, 2024, primarily due to paydowns in commercial and industrial loans and the home equity portfolio, partially offset by growth in construction and residential mortgage loans. Total deposits increased by 2.2% to $21.08 billion, with notable growth in public and other deposits.

Credit quality remains a hallmark of BOH's financial health. Net charge-offs were exceptionally low at $2.6 million, or 0.07% annualized, in Q3 2025. Non-performing assets (NPAs) stood at $16.86 million, or 0.12% of total loans and foreclosed real estate, down two basis points from a year ago. The allowance for credit losses (ACL) on loans and leases was $148.78 million, representing 1.06% of total loans and leases outstanding.

Liquidity is robust, with cash and cash equivalents at $1 billion and available-for-sale (AFS) investment securities at $3.28 billion as of September 30, 2025. The ratio of readily available liquidity to adjusted uninsured deposits was 134%, up from 116% at year-end 2024, driven by increased cash and cash equivalents. Capital levels remain strong, with a Tier 1 capital ratio of 14.34% and a total capital ratio of 15.40%, both well above regulatory well-capitalized thresholds.

Outlook and Guidance

Bank of Hawaii's management projects continued positive momentum, particularly in its net interest margin. The company anticipates NIM to expand further, with a "reasonably likely potential" to reach 2.50% by the fourth quarter of 2025. Looking into 2026, a "base layer" of approximately 25 basis points of NIM pickup per year is expected, driven by the ongoing fixed-asset accretion. Management also foresees additional upside from potential Fed funds rate reductions and further repricing of the deposit book. The company is forecasting two additional 25 basis point rate cuts in 2025, anticipating that each cut will initially reduce NII by approximately $300,000 but ultimately contribute an estimated positive $1.6 million to quarterly NII after the CD book reprices.

Loan growth is projected to remain in the "low single digits" for the near term, with pipelines showing improvement. Management suggests that increased clarity in the economy and further rate reductions could provide "potential upside" to this guidance.

For non-interest income, the normalized fourth-quarter 2025 figure is expected to be between $42 million and $43 million. This forecast incorporates the impact of the merchant services portfolio sale on October 1, 2025, which is expected to generate a one-time gain of approximately $18 million in Q4 2025, while also decreasing quarterly non-interest income by approximately $3 million. This divestiture, combined with a strategic repositioning of $200 million of AFS securities (expected to realize a loss of $16 million to $17 million in Q4 2025 but increase quarterly NII by $1.7 million), is projected to result in a total quarterly improvement to pre-tax earnings of approximately $1 million.

Normalized non-interest expense for Q4 2025 is anticipated to be around $109 million, with the full-year 2025 normalized expense expected to increase by approximately 3.5% from 2024. This includes strategic investments in "revenue-enhancing initiatives" in wealth, mobile, and data analytics. The effective tax rate for the full year 2025 is expected to be between 21% and 21.5%.

The Board of Directors declared a quarterly cash dividend of $0.70 per common share, payable in December 2025, and also declared preferred stock dividends. While no common shares were repurchased in Q3 2025, the company has $126 million remaining under its buyback authority and is likely to engage in repurchase activity in Q4 2025 and into 2026, signaling confidence in its valuation.

Risks and Challenges

Despite a strong outlook, Bank of Hawaii faces several inherent risks. Its business is sensitive to regional economic conditions, particularly in Hawaii, Guam, and other Pacific Islands. A downturn in the real estate market, where a significant portion of its loan portfolio is secured, could adversely affect results. A sustained period of high inflation or disruptions in the broader banking industry also pose risks. Changes in interest rates, while currently favorable for NIM expansion, could also adversely impact operations and capital if movements are unexpected or rapid.

Operational risks, including cybersecurity threats, fraud, and failures in information systems or outsourcing arrangements, remain a constant concern. The company's Operational Risk and Compliance Committee (ORC) provides oversight, but no system can guarantee the absence of business disruption or losses. While credit quality is pristine, the allowance for credit losses may prove insufficient to absorb unforeseen losses. Furthermore, the company's limited geographic scope could restrict revenue diversification and expose it to regional economic risks, potentially leading to volatility in market share and cash flow.

Conclusion

Bank of Hawaii Corporation presents a compelling investment thesis rooted in its deeply entrenched regional market leadership, disciplined financial management, and strategic initiatives aimed at future growth. The company's "fortress credit position" and robust capital levels provide a strong foundation, while its consistent net interest margin expansion, driven by effective asset-liability management and deposit repricing, underscores its operational prowess. BOH's strategic pivot into wealth management, bolstered by technological enhancements through "Banco Advisors," represents a clear pathway to diversify revenue and capitalize on the affluent Hawaiian market.

While facing competitive pressures from both regional and national players, BOH's distinct advantages in local market expertise and customer loyalty remain formidable. The company's prudent outlook, balanced with a willingness to deploy capital for shareholder returns through dividends and potential share repurchases, reflects a confident management team. Investors should recognize BOH's ability to generate stable earnings and expand margins in a dynamic environment, supported by a resilient local economy and a clear strategic roadmap that integrates technological innovation to enhance its core banking franchise.