Bank of Hawaii Earnings Call Signals NIM-Driven Upside

Bank Of Hawaii ((BOH)) has held its Q4 earnings call. Read on for the main highlights of the call.

Bank of Hawaii’s Earnings Call Strikes Confident Tone Amid Measured Credit Watch

Bank of Hawaii’s latest earnings call painted a broadly upbeat picture, with management highlighting strong earnings growth, expanding net interest margin (NIM), improving funding costs, resilient credit quality, and robust capital that supports renewed share buybacks. While there were some caution flags—such as modestly higher early-stage delinquencies, slight reserve normalization, one-off items in noninterest income, and still-muted loan growth—the overall message was one of an institution in control of its balance sheet and positioned for continued earnings improvement.

Strong Earnings and EPS Rebound

Bank of Hawaii delivered a powerful earnings rebound, reporting net income of $60.9 million and diluted EPS of $1.39, up 63% year-over-year and 16% sequentially. This jump reflects both stronger core performance and the earnings leverage from a better-structured balance sheet. For investors, the magnitude of EPS growth signals that the bank is effectively navigating higher-rate dynamics and cost pressures, translating management’s strategic moves directly into bottom-line improvement.

Net Interest Margin Expands for Seventh Straight Quarter

Net interest margin continued its steady climb, rising 15 basis points in the quarter to 2.61%, with a December/spot NIM near 2.67%. This marks the seventh consecutive quarter of NIM expansion. Management emphasized that the trend is still not at its ceiling and suggested NIM could approach roughly 2.90% by 2026. The sequential NIM gains underscore the bank’s ability to reprice assets and optimize funding in a still-tight, but more favorable, rate environment.

Net Interest Income Driven by Repricing and Portfolio Actions

Net interest income rose by $8.7 million in the quarter, the biggest increase in the recent seven-quarter stretch. The improvement was powered by a combination of fixed-asset repricing, a $200 million repositioning within the securities portfolio, and a beneficial remix of deposits. These drivers are largely structural rather than one-time benefits, suggesting a more durable earnings base. Management stressed that these actions should continue to contribute to NII as more of the balance sheet rolls into higher-yielding assets.

Deposit and Funding Costs Move in the Right Direction

Funding trends were a bright spot, as noninterest-bearing demand deposits grew 6.6% sequentially, offering cheaper, stable funding. Interest-bearing deposit costs declined about 20 basis points, and the total cost of funds fell roughly 16 basis points. The deposit beta—the measure of how much deposit costs move relative to market rates—rose from 28% to 31%, with a spot deposit rate of 1.3%, 13 basis points lower than the quarterly average. While management acknowledged some seasonality in deposit inflows, the direction of travel on funding costs is clearly supportive of further NIM and NII gains.

Balance Sheet Remix Adds Yield and Lowers CD Costs

The bank executed additional balance sheet optimization, remixing $659 million of fixed-rate loans and investments from a roughly 4% roll-off into a 5.8% roll-on, capturing higher yields. Certificates of deposit saw their average cost fall 22 basis points to 3.18%, and of the CDs maturing over the next three months, about 52% carry an average rate of 3.1% and are expected to reprice mostly into the 2.25%–3.0% range. These actions collectively increase asset yields while bringing down future funding costs, creating a tailwind for profitability over the next several quarters.

Concentrated, High-Quality Credit Portfolio

Bank of Hawaii’s loan book remains heavily anchored in its core markets, with 93% of exposure in Hawaii, and skewed toward low-risk consumer lending. Consumer loans account for about 57% (approximately $8 billion) of the portfolio, with 86% of that in residential and home equity loans. These residential portfolios carry strong metrics, including a weighted-average loan-to-value ratio of 48% and an average FICO score of 799. On the commercial side, the $6.1 billion book (43% of loans) includes $4.2 billion of commercial real estate (CRE), where weighted-average LTVs sit below 60% and only 1.6% of CRE exposure is above 80% LTV. These figures support management’s confidence that the bank is well-insulated from severe credit shocks.

Low Credit Losses and Stable Reserves

Credit costs remained modest. Net charge-offs were $4.1 million, or just 12 basis points annualized, and nonperforming assets fell to a low 10 basis points of total assets. The allowance for credit losses ended the quarter at $146.8 million, equating to 1.04% of loans. Despite a small decline in reserve coverage sequentially, overall loss levels remain low, and asset quality metrics point to a conservative risk posture. Management framed the reserve position as appropriate given benign realized losses and the healthy economic outlook for its markets.

Capital Strength Supports Dividends and Buybacks

Regulatory capital ratios remained robust, with Tier 1 capital at 14.5% and total risk-based capital at 15.5%, both comfortably above “well-capitalized” thresholds. The bank returned capital to shareholders through both dividends and buybacks, paying $28 million in common dividends and $5.3 million on preferred stock. Share repurchases resumed in the quarter, with about $5 million of stock bought back at an average price of $65, and $121 million still authorized under the plan. Management signaled an intention to ramp repurchases from here, highlighting confidence in the earnings trajectory and valuation.

Expense Discipline and Efficiency Outlook

Noninterest expense fell to $109.5 million from $112.4 million sequentially, though the quarter included certain nonrecurring items that cloud comparability. Looking forward, management expects 2026 expenses to be up roughly 3.0%–3.5% versus normalized 2025 levels, reflecting moderate cost inflation and investment in growth. For the nearer term, first-quarter normalized noninterest expense is projected around $113 million. While higher incentive accruals pushed recent run-rate expenses slightly above prior forecasts, the overall message is that the bank sees expense growth as manageable and in line with revenue opportunities.

Wealth and Fee Income Building Momentum

After stripping out one-time items, noninterest income was essentially flat at $44.3 million, but underlying trends were more encouraging, particularly in wealth management. The wealth business delivered quarter-over-quarter fee growth, and management expects continued positive momentum toward prior long-term fee income targets. For investors, a stronger, more stable fee base is key to diversifying revenue away from pure spread income and can help smooth earnings through rate cycles.

Early-Stage Credit Metrics Tick Higher

While overall asset quality remains strong, leading credit indicators showed mild deterioration. Delinquencies rose to 36 basis points, up 7 basis points sequentially and 2 basis points year-over-year, and criticized loans increased to 2.12%, up 7 basis points from the prior quarter. Management framed these shifts as manageable and consistent with a normalization from unusually benign levels rather than a sign of systemic stress. Still, the uptick bears watching, as it could foreshadow higher charge-offs if economic conditions weaken.

Modest Uptick in Net Charge-Offs and Lower ACL Coverage

Net charge-offs, at $4.1 million or 12 basis points annualized, were up 5 basis points sequentially and 2 basis points from a year ago, partly due to a roughly $1 million idiosyncratic credit event. Simultaneously, the allowance for credit losses declined by about $2 million, with the ACL/loan ratio slipping 2 basis points to 1.04%. Management attributed the modest reserve release to an improved macro outlook in its economic modeling. While the absolute level of coverage remains conservative, investors may note that the cushion is edging lower at a time when early-stage metrics are drifting higher.

One-Off Noninterest Income Items Add Volatility

Reported noninterest income was affected by a mix of one-time items, including an $18.1 million gain on the sale of merchant services operations, largely offset by a $16.8 million loss tied to investment portfolio repositioning and a roughly $0.77 million Visa conversion-related charge. These items helped advance the strategic repositioning of the balance sheet but also reduced quarter-to-quarter comparability and introduced short-term volatility into reported fee income. Management emphasized that the underlying core fee trajectory, particularly in wealth management, remains constructive.

Loan Growth Still Subdued Despite Improving Pipeline

Loan balances were essentially flat for 2025 on an end-of-period basis, and management only expects low-to-mid single-digit loan growth in 2026. While the pipeline is said to be improving, it has not yet translated into robust balance sheet expansion. For shareholders, this suggests that near-term earnings growth will rely more on NIM expansion, funding optimization, and capital return than on volume growth. The slower growth profile may also reflect management’s disciplined underwriting standards and focus on protecting asset quality.

Deposit Growth Seasonality and Stickiness Questions

The 6.6% sequential jump in noninterest-bearing deposits was a meaningful contributor to lower funding costs, but management cautioned that this increase may be partly seasonal and possibly outsized. That introduces some uncertainty around how sticky these balances will be in coming quarters. Still, with the spot deposit rate running below the quarter average and cost-of-funds trending down, the bank appears to have room to benefit even if some of the recent influx moderates.

Tax and Near-Term Expense Pressures Temper the Upside

The effective tax rate came in at 21.5% in the fourth quarter but is expected to move closer to about 23% in 2026 due to fewer discrete tax benefits. In addition, first-quarter expenses are seasonally higher, and normalized noninterest expenses landed a bit above earlier guidance, largely due to higher incentive compensation. While these items do not derail the positive earnings story, they slightly offset some of the benefits from NIM expansion and funding improvements and are important considerations for modeling net income.

Guidance Points to Further NIM Upside, Stable Credit, and Rising Buybacks

Management’s guidance underscores confidence in continued earnings momentum. NIM is expected to keep expanding, with the year ending around the current 2.67% spot level and a longer-term target near 2.90% by year-end 2026, helped by favorable deposit dynamics, lower CD repricing costs, and active interest-rate hedges—$1.5 billion of pay-fixed/receive-floating swaps at a 3.5% rate plus an additional $500 million of forward swaps at 3.1%. Loan growth is projected to improve to the mid-single-digit range in 2026, albeit off a flat 2025 base. For 2026, management assumes Q1 normalized noninterest income of $42–43 million, Q1 normalized noninterest expense around $113 million, and full-year expenses up 3–3.5% versus a roughly $441 million 2025 normalized base. Provisions for credit losses are expected to remain modest, with strong asset quality metrics—low NPAs and low net charge-offs—continuing, even as delinquencies and criticized loans normalize off ultra-low levels. The effective tax rate is anticipated around 23%. With Tier 1 capital at 14.5% and total risk-based capital at 15.5%, the bank plans to continue returning capital, targeting an increase in share repurchases towards roughly $15–20 million per quarter under the remaining $121 million authorization, alongside ongoing dividends.

In sum, Bank of Hawaii’s earnings call portrayed a bank leaning into an improving rate and funding backdrop, with NIM expansion, tight credit, and strong capital forming the backbone of its story. While modestly rising delinquencies, slightly lower reserve coverage, and subdued loan growth introduce some caution, management’s guidance around continued margin expansion and stepped-up buybacks offers a constructive setup for shareholders. For investors watching regional banks, Bank of Hawaii appears to be executing a disciplined, balance-sheet-first strategy aimed at converting stable local market strength into consistent shareholder returns.