BANK OF HAWAII CORP quarterly report, Q2 FY2023

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Bank of Hawaii Corporation — Q2 2023 Form 10-Q

Business context and period. Unaudited quarterly report for the three and six months ended June 30, 2023. The company provides consumer and commercial banking and related financial services, primarily in Hawaii and the Pacific Islands.

Financial performance and condition

Unless otherwise noted, amounts are in millions of dollars. Comparisons are with Q2 or the first six months of 2022, as applicable.

  • Q2 earnings: Net income was $46.1 million, down 19%; diluted EPS was $1.12, down from $1.38. Return on average common equity was 14.95%, versus 18.19%.
  • Revenue and margins: Net interest income was $124.3 million, down 6%; net interest margin fell 25 basis points to 2.22%. Interest income rose to $199.8 million from $139.6 million, but interest expense increased to $75.4 million from $6.7 million as funding costs rose. Noninterest income was $43.3 million, up 2.6%; noninterest expense was $104.0 million, up 1%. Pretax income was $61.1 million, versus $74.6 million.
  • Six-month results: Net income was $92.9 million, down from $111.7 million; diluted EPS was $2.26, versus $2.70. Net interest income was $260.3 million, compared with $258.2 million, while noninterest income declined to $84.0 million from $85.7 million.
  • Credit: Q2 provision for credit losses was $2.5 million, compared with a $2.5 million benefit a year earlier. Net loan charge-offs were $1.4 million, or 0.04% annualized. The allowance for loan and lease losses was $145.4 million, equal to 1.04% of loans, versus 1.15% a year earlier. Nonperforming assets were $11.5 million, or 0.08% of loans and foreclosed real estate.
  • Balance sheet and liquidity: Total assets were $24.9 billion, up 7.4% from December 31, 2022. Loans and leases rose 2.0% to $13.9 billion; deposits fell 0.5% to $20.5 billion. Cash and cash equivalents were $1.7 billion, and available-for-sale securities were $2.7 billion. Management reported additional borrowing capacity of $5.2 billion from the Federal Reserve and $1.4 billion from the FHLB.
  • Debt and funding: FHLB advances increased by $1.35 billion to $1.75 billion, with a 4.26% weighted-average rate and 2.96-year weighted-average maturity. Total deposits included $2.66 billion of time deposits, up from $1.71 billion at year-end. Estimated uninsured deposits were $10.5 billion; approximately $2.4 billion were collateralized by government-backed securities.
  • Cash flow, first half: Operating activities used $19.4 million, compared with $158.3 million provided a year earlier. Investing activities provided $118.9 million; financing activities provided $1.17 billion, including $1.35 billion of long-term debt proceeds. Ending cash and cash equivalents were $1.67 billion, versus $839.4 million at June 30, 2022.
  • Capital and shareholder returns: The company reported a preliminary common equity Tier 1 ratio of 11.00%, total capital ratio of 13.24%, and Tier 1 leverage ratio of 7.21%, and said it remained well-capitalized. It paid $55.9 million in common dividends and $3.9 million in preferred dividends during the first half. No shares were repurchased under the program in Q2; remaining authorization was $126.0 million.

Material changes and notable items

  • Higher asset yields were more than offset in Q2 net interest income by sharply higher funding costs and increased liquidity. Management attributed margin pressure chiefly to funding costs and liquidity, partly offset by higher earning-asset yields.
  • Investment securities totaled $7.9 billion at carrying value, down 4.9% from year-end. At June 30, the held-to-maturity portfolio had a fair value of $4.41 billion versus a $5.20 billion carrying value. Management attributed unrealized losses mainly to interest rates, not credit deterioration, and said it did not intend or expect to be required to sell the securities before recovery.
  • Q2 noninterest income included a $1.5 million gain from the sale of a low-income housing tax credit investment. The filing also reports investment-securities losses related to fees from prior Visa Class B share-sale transactions, not sales of investment securities.
  • FDIC insurance expense rose 100% year over year in Q2 to $3.2 million. A proposed FDIC special assessment could add expense if adopted; the filing says the assessment would be recognized when the rule is adopted.
  • For the first half, net cash used in operating activities was affected in part by a $145.9 million net change in other assets and liabilities. The filing does not provide a single explanatory breakdown for that cash-flow movement in the supplied text.

Outlook, commentary, and risks

  • No specific full-year earnings or financial guidance is provided. Management said Hawaii visitor activity remained only slightly below pre-pandemic levels, with delayed recovery in Japanese visitors; public-sector construction was expected to continue supporting the economy amid high interest rates and a slowing U.S. economy.
  • Management described credit risk as strong overall but maintained a qualitative reserve overlay for economic uncertainty and recession downside risk. Oahu home sales volumes and median prices were lower year over year, although housing inventory remained low.
  • Key disclosed risks include interest-rate and funding-cost changes, deposit competition and industry disruption, recession and credit deterioration, Hawaii tourism weakness, regulatory changes and potential FDIC assessments, liquidity and capital access, cybersecurity and vendor/operational failures, natural disasters, and litigation or regulatory investigations.
  • Management’s interest-rate simulation estimated future annual net interest income would rise 1.9% under a gradual +200-basis-point scenario and fall 1.2% under a gradual −100-basis-point scenario. The filing notes that modeled outcomes depend on assumptions and that sensitivity was greater than at year-end 2022.
  • Legal proceedings arise in the ordinary course; management said currently available information did not indicate losses materially above reserves, while noting unexpected developments could produce materially higher losses.

Important facts for investors to verify

  • Whether deposit mix, deposit pricing, and reliance on FHLB advances continue to pressure net interest margin.
  • Liquidity and funding capacity, including uninsured deposits, collateral availability, and the maturity and cost of borrowings.
  • Credit trends in consumer and commercial portfolios, charge-offs, past-due loans, and the adequacy of the allowance under changing economic conditions.
  • Interest-rate exposure and the implications of unrealized securities losses, particularly the held-to-maturity fair-value shortfall and potential liquidity needs.
  • The final FDIC assessment rule and its effect on expenses, as well as actual capital ratios and any subsequent changes to dividends or share repurchases.