Bank of Hawaii: Repricing Dynamics and Margin Expansion as a Path to Undervalued Growth

In the ever-shifting landscape of financial markets, investors are increasingly seeking companies that can navigate macroeconomic volatility while maintaining profitability and shareholder value. Bank of Hawaii (BOH), a regional banking giant with a dominant presence in the Aloha State, has emerged as a compelling case study in how disciplined asset repricing, stable credit quality, and cost efficiency can create a resilient business model even as interest rates begin to normalize.

The Repricing Advantage: Locking in Margins Amid a Slowing Curve

One of the most striking features of BOH's 2025 performance is its ability to expand its net interest margin (NIM) in a high-rate environment. For the second quarter of 2025, BOH reported a NIM of 2.39%, up 7 basis points from the prior quarter and 24 basis points year-over-year. This growth was driven by two key factors: the reinvestment of cash flows from maturing fixed-rate assets into higher-yielding opportunities, and a strategic shift in the composition of its earning asset base.

The bank's average yield on loans and leases rose to 4.80% in Q2 2025, reflecting its success in repricing new and existing loans at rates that outpace the decline in deposit costs. This is critical as the Federal Reserve signals a potential pause in rate hikes and hints at cuts later in the year. BOH's ability to capture higher yields before rates retreat positions it to maintain its NIM even as the broader market adjusts to a lower-rate environment.

Moreover, the bank's net interest income (NII) grew by 3.1% quarter-over-quarter to $129.7 million, underscoring the power of its asset repricing strategy. With over 93% of its loan portfolio concentrated in Hawaii—a market characterized by low competition and strong borrower credit quality—BOH has maintained pricing power while minimizing the risk of asset deterioration.

Credit Quality: A Fortress in a Storm

While margin expansion is often the focus in rising rate environments, it is the stability of credit metrics that truly defines a bank's long-term viability. BOH's credit quality remains a standout, with non-performing assets at 0.13% of total loans and leases, a modest increase from 0.12% in the prior quarter but still well below industry averages. Net loan charge-offs for the quarter were 7 basis points annualized, a decline from the prior year and a testament to the bank's conservative underwriting standards.

The allowance for credit losses, at 1.06% of total loans, provides a robust buffer against potential downturns. This reserve is bolstered by the bank's long-standing customer relationships—60% of its commercial and consumer clients have been with BOH for over a decade—and a loan portfolio that is heavily secured by real estate. For example, 86% of consumer loans are backed by real estate with a weighted average loan-to-value (LTV) ratio of 48%, while commercial real estate (CRE) loans carry a 55% LTV and are diversified across property types.

Even as the broader economy faces headwinds, BOH's credit metrics suggest it is well-positioned to withstand a slowdown. The bank's Tier 1 capital ratio of 14.2% and total risk-based capital ratio of 15.2% provide ample capacity to absorb losses, while its proactive approach to risk management—such as its focus on affordable housing and disaster relief—further insulates it from regional shocks.

Cost Discipline: A Hidden Engine of Profitability

In an era where net interest margins are under pressure, operational efficiency is a critical differentiator. BOH's efficiency ratio improved to 63.49% in Q2 2025, down from 65.03% in the prior quarter, reflecting its commitment to cost control. Noninterest expenses rose modestly by 0.3% quarter-over-quarter to $110.8 million, driven largely by higher FDIC insurance costs but partially offset by reduced salaries and benefits.

The bank's digital transformation has played a pivotal role in this efficiency. With over 245,000 customers using its enhanced mobile app—featuring budgeting tools, real-time alerts, and mobile wallet integration—BOH has reduced the need for costly in-branch interactions. Behind the scenes, the bank is leveraging Microsoft Azure for cloud infrastructure and exploring generative AI applications in customer service and workforce training, further driving down operational costs.

Management has also signaled a 2-3% increase in expenses for the second half of 2025, but this is attributed to the absence of one-time severance charges rather than structural inefficiencies. This disciplined approach to cost management ensures that BOH can maintain profitability even as margin expansion slows.

Strategic Resilience in a Slowing Rate Environment

Looking ahead, BOH's leadership has outlined a clear strategy for navigating a potential rate cut cycle. The bank expects its NIM to reach 2.50% by year-end, supported by its ability to extend the maturity of earning assets and manage deposit costs. With the cost of deposits at 1.58%, BOH has a significant edge over peers in maintaining its margin as rates stabilize.

The bank's dividend strategy further reinforces its appeal to income-focused investors. Despite a 97.5% payout ratio, BOH has maintained a 5.57% dividend yield for over five decades, supported by a return on common equity (ROCE) of 12.5%. While the yield appears attractive, investors should monitor the bank's ability to sustain earnings growth as loan growth in Hawaii—a market with limited expansion potential—slows.

BOH's geographic concentration in Hawaii, while a potential risk, also offers unique advantages. The bank holds a 33-34% market share in the state, where it benefits from a stable real estate market and a loyal customer base. With median home prices in Oahu rising 6.0% year-to-date, BOH's CRE portfolio remains resilient, and its focus on long-term maturities (over half of CRE loans mature in 2030 or later) reduces near-term refinancing risks.

A Case for Long-Term Investment

For investors seeking a balance of income and capital appreciation, BOH presents a compelling opportunity. Its strategic focus on asset repricing, stable credit quality, and cost efficiency has positioned it to outperform in a slowing rate environment. The bank's valuation is also attractive, with a price-to-book (P/B) ratio of 1.3, below the industry average of 1.5, suggesting it is undervalued relative to its capital strength and earnings power.

However, risks remain. Hawaii's economy is vulnerable to tourism fluctuations and natural disasters, and a broader slowdown in the U.S. could impact the bank's loan growth. That said, BOH's proactive risk management, conservative underwriting, and strong capital position provide a buffer against these headwinds.

In conclusion, Bank of Hawaii's disciplined approach to asset repricing, credit management, and cost control has created a model that is both resilient and profitable. As the Federal Reserve navigates a potential rate cut cycle, BOH's ability to maintain its NIM while preserving credit quality positions it as a standout in the regional banking sector. For long-term investors, the bank offers a rare combination of income security, capital preservation, and growth potential—making it a compelling addition to a diversified portfolio.