Bank of Hawaii Corporation — 2021 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2021, with fourth-quarter results also reported. Bank of Hawaii is a regional bank serving Hawaii, Guam, and other Pacific Islands through Consumer Banking, Commercial Banking, and Treasury and Other.
Financial performance and position
- Earnings: Net income was $253.4 million, up 65% from $153.8 million in 2020. Net income available to common shareholders was $250.4 million; diluted EPS was $6.25, up 62% from $3.86. Fourth-quarter net income available to common shareholders was $61.9 million, with diluted EPS of $1.55.
- Revenue and margins: Net interest income was $497.3 million, slightly above $496.3 million in 2020. Taxable-equivalent net interest margin declined to 2.36% from 2.73%. Noninterest income fell 7% to $171.4 million.
- Credit costs and asset quality: Provision for credit losses was a net benefit of $50.5 million, compared with a $117.8 million expense in 2020. Net charge-offs were $6.0 million, or 0.05% of average loans. Nonperforming assets were $19.0 million; nonaccrual loans and leases were 0.14% of total loans and leases.
- Balance sheet and liquidity: Total assets were $22.8 billion, up 11%; loans and leases were $12.3 billion, up 3%; deposits were $20.4 billion, up 12%. Cash and cash equivalents totaled $560.4 million, and available-for-sale securities were $4.3 billion. The Bank had $3.0 billion of additional FHLB borrowing capacity and $713.3 million available from the Federal Reserve, based on pledged collateral.
- Debt and capital: Repurchase-agreement funding was $450.5 million, down from $600.6 million; other debt was $10.4 million after repayment of $50 million in FHLB advances. Shareholders’ equity was $1.6 billion. The Company’s CET1, Tier 1, total capital, and leverage ratios were 12.12%, 13.56%, 14.81%, and 7.32%, respectively; the Company and Bank were classified as well capitalized.
- Cash flow: Operating cash flow was $377.2 million versus $146.4 million in 2020. Investing activities used $2.42 billion, largely reflecting securities purchases; financing activities provided $1.99 billion, primarily from deposit growth. Cash and cash equivalents declined $53.7 million to $560.4 million.
Material changes versus 2020
- Earnings improved mainly because credit-loss provisioning shifted from a large expense to a net benefit. The allowance for loan and lease credit losses decreased to $157.8 million from $216.3 million; coverage declined to 1.29% from 1.81% of loans and leases.
- Interest-bearing funding costs fell, but asset yields declined more: annual net interest margin contracted 37 basis points. Average earning assets grew 16%, including a $2.1 billion increase in average investment securities.
- Consumer loans grew 7%, while commercial loans and leases declined 3%, including a 76% reduction in PPP balances as loans were forgiven. Deposits increased across consumer and commercial customers.
- Other comprehensive income swung to a $74.2 million loss from $38.9 million of income, primarily reflecting interest-rate-driven unrealized losses on securities. Gross unrealized losses on temporarily impaired securities were $142.8 million at year-end; management attributed these mainly to rates, not credit, and said it did not expect to sell the securities before recovery.
- The Company issued $175.5 million net of Series A preferred stock proceeds. It paid $110.6 million in common dividends and repurchased $31.3 million of common stock during 2021.
Outlook, commentary, risks, and unusual items
- Management described liquidity, capital, and credit reserves as strong or adequate, and said it would continue balancing growth with prudent risk and capital management. The filing provides no specific earnings or balance-sheet guidance.
- Management reported an improving but still recovering Hawaii economy: December 2021 unemployment was 5.7%, and Oahu home sales and prices rose materially year over year. Tourism recovery remains important because local activity and borrowers are exposed to visitor demand.
- Interest-rate exposure is material. Year-end modeling estimated annual net interest income would rise 6.1% under a gradual +200 basis-point scenario and fall 1.8% under a gradual -100 basis-point scenario; modeled results depend on assumptions and are not forecasts. The filing also identifies LIBOR transition, inflation, COVID-19 effects, climate and natural-disaster exposure, defense spending, cybersecurity, competition, and regulation as risks.
- Unusual items included a $9.4 million net gain on real estate sales that helped reduce occupancy expense, $7.0 million of early termination costs from repaying repurchase agreements and FHLB advances, and the prior-year Visa Class B share sale gain that did not recur. The 2021 allowance release was a major driver of year-over-year earnings growth.
- COVID-related loan modifications outstanding at year-end totaled $40.5 million in commercial loans and leases and $3.1 million in consumer loans and leases. Management cautioned that borrowers’ ability to resume contractual payments remained uncertain.
- A previously disclosed overdraft-fee class action settled for an $8.0 million fund; settlement became effective in January 2021. Management said other legal matters were not expected to materially affect results, while noting unexpected developments could produce material losses. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How sustainable earnings are when the $50.5 million credit-provision benefit is excluded or credit-loss assumptions change.
- Whether loan growth, deposit mix, funding costs, and net interest margin hold up as interest rates and local economic conditions change.
- Whether the allowance and remaining COVID-modified loans adequately reflect borrower performance and future credit risk.
- The market-value and duration exposure of the $9.0 billion securities portfolio, including the effect of further rate changes on accumulated other comprehensive income and capital.
- Capital distribution capacity and the terms and cost of the preferred stock, including the Bank’s ability to upstream dividends to the Parent.
- Potential developments in legal, regulatory, cyber, climate, and LIBOR-transition risks; the filing does not quantify a clear maximum exposure for several of these risks.