Bank of Hawaii Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are against December 31, 2022 unless noted. The unaudited filing covers a Hawaii- and Pacific-focused regional bank serving consumers, businesses, and governments.
Key financial results
| Metric | Q1 2023 | Comparable / change |
|---|---|---|
| Net interest income | $136.0 million | Up 9% year over year; net interest margin was 2.47%, up 13 basis points |
| Net income | $46.8 million | Down $8.0 million, or 15%, year over year |
| Net income available to common shareholders | $44.9 million | Compared with $52.9 million |
| Diluted earnings per share | $1.14 | Compared with $1.32 |
| Noninterest income | $40.7 million | Down 6% year over year |
| Noninterest expense | $111.9 million | Up 8% year over year |
| Provision for credit losses | $2.0 million expense | Compared with a $5.5 million benefit |
| Net charge-offs | $2.7 million; 0.08% annualized | Compared with $1.5 million; 0.05% annualized |
Interest income rose to $188.3 million from $130.6 million, while interest expense increased to $52.4 million from $5.3 million. Higher asset yields and loan growth lifted net interest income, but rising funding costs sharply increased interest expense. Return on average common equity was 15.79%, versus 15.44% a year earlier; the effective tax rate was 25.38%, versus 22.15%.
Balance sheet, funding and capital
- Assets and lending: Total assets were $23.9 billion, up 1.4% from year-end. Loans and leases were $13.8 billion, up 1.3%; growth was concentrated in commercial mortgage, residential mortgage, and home equity lending.
- Deposits: Total deposits were $20.5 billion, down 0.6% from year-end. Estimated uninsured deposits were $10.7 billion. Noninterest-bearing demand deposits were $6.4 billion, down from $6.7 billion at year-end.
- Borrowings: Short-term borrowings were $325 million, compared with none at year-end. Other debt was $510 million, including $500 million of FHLB advances, up $100 million. Repurchase agreements were $725 million, unchanged.
- Liquidity: Cash and cash equivalents were $612 million; available-for-sale securities had a carrying value of $2.8 billion. The company reported additional borrowing capacity of $2.3 billion from the FHLB and $4.5 billion from the Federal Reserve, based on pledged collateral.
- Credit reserves and asset quality: The allowance for loan and lease losses was $143.6 million, or 1.04% of loans, versus $144.4 million, or 1.06%, at year-end. Nonperforming assets were $12.1 million, or 0.09% of loans and foreclosed real estate. Accruing loans 90 days or more past due rose to $7.5 million from $5.4 million at year-end.
- Securities and equity: Investment securities totaled about $8.1 billion. AFS securities had $297 million of gross unrealized losses; HTM securities had a $711 million fair-value shortfall against carrying value. Management attributed losses primarily to interest rates, said it did not intend to sell the affected securities, and considered forced sales before recovery unlikely. Shareholders’ equity was $1.35 billion; accumulated other comprehensive loss improved to $405 million from $435 million.
- Regulatory capital: Preliminary CET1, Tier 1, total capital, and Tier 1 leverage ratios were 10.88%, 12.10%, 13.13%, and 7.19%, respectively. The company said its capital remained “well-capitalized.”
Cash flow and shareholder returns
Operating cash flow was negative $31.0 million, compared with positive $41.8 million a year earlier; the filing reports a $100.6 million net change in other assets and liabilities as a major operating cash-flow adjustment. Investing activities used $17.1 million, while financing activities provided $258.3 million, including $325 million of short-term borrowing and $100 million of long-term debt proceeds. Cash and cash equivalents increased by $210.2 million to $612.0 million.
The company paid $27.9 million in common dividends and $2.0 million in preferred dividends and repurchased 150,000 shares for $9.9 million under its buyback program. Remaining repurchase authorization was approximately $126 million. In April, the board declared a $0.70-per-share common dividend.
Material changes and management commentary
- Net interest margin improved year over year as the higher-rate environment and loan growth raised asset yields. Interest-bearing deposit costs also rose substantially; average interest-bearing deposit cost was 1.09%, versus 0.07% a year earlier.
- Noninterest income declined mainly because of lower customer derivative-program and mortgage-banking income. Noninterest expense increased, including $3.1 million of separation expense, seasonal payroll costs, higher equipment expenses, and higher FDIC insurance expense.
- Hawaii visitor arrivals and job growth continued to support economic recovery; domestic visitor arrivals exceeded pre-pandemic levels, while international arrivals remained below them. Management cited expected moderate visitor growth and construction activity as an economic offset. Oahu home-sale volumes declined year over year, while housing inventory remained low.
- Management described credit quality as strong but retained a qualitative reserve overlay for economic uncertainty and recession risk. Loan modifications to financially troubled borrowers totaled $9.4 million during the quarter; none were reported to have subsequently defaulted by March 31.
- Interest-rate simulation estimated annual net interest income would rise 3.0% under a gradual +200-basis-point scenario and 5.5% under an immediate +200-basis-point scenario; a -200-basis-point scenario was not provided. The filing says the sensitivity profile was more rate-sensitive than at year-end.
Outlook, risks and contingencies
The filing gives no specific quantitative earnings or balance-sheet guidance. Management cautions that interim results are not necessarily indicative of full-year results. Forward-looking risks include disruption or instability in banking markets, deposit competition or withdrawals, higher funding costs, unrealized securities losses, interest-rate changes, recession and inflation, credit deterioration, Hawaii tourism conditions, operational and cyber risks, regulatory changes, and litigation.
The company specifically added risk discussion regarding recent bank failures and industry confidence: these events could affect its stock price, funding access, deposits, liquidity, capital, regulation, and FDIC assessments. It reported various legal proceedings in the ordinary course of business; management did not expect outcomes materially in excess of reserves based on information then available, while noting unexpected developments could produce larger losses. Disclosure controls were deemed effective, with no material internal-control changes reported for the quarter.
Most important facts for investors to verify
- Deposit stability, uninsured-deposit mix, and any further need for short-term or higher-cost funding.
- Net interest margin and deposit pricing as interest rates and funding competition change.
- Fair-value discounts on HTM and AFS securities, liquidity assumptions, and the company’s ability to avoid selling securities before recovery.
- Credit trends, especially the rise in accruing loans 90 days or more past due, consumer charge-offs, and the adequacy of the allowance and unfunded-commitment reserve.
- Whether elevated expenses, including separation costs and FDIC assessments, persist beyond Q1.
- Capital ratios, borrowing capacity, and the pace of dividends and share repurchases under changing market conditions.