Bank of Hawaii Corporation — 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results. The company is a bank holding company headquartered in Honolulu, serving Hawaii, Guam, and other Pacific Islands.
Financial results and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $97.5 million | $103.9 million | $197.2 million | $211.6 million |
| Provision for credit losses | $3.6 million | $15.9 million | $8.3 million | $36.7 million |
| Noninterest income | $49.5 million | $68.9 million | $103.4 million | $140.7 million |
| Noninterest expense | $93.8 million | $85.9 million | $179.9 million | $167.6 million |
| Net income | $35.1 million | $46.6 million | $77.5 million | $99.3 million |
| Diluted EPS | $0.74 | $0.96 | $1.62 | $2.05 |
| Net interest margin | 3.16% | 3.51% | 3.20% | 3.61% |
Q2 total revenue, defined as net interest income plus noninterest income, was $147.0 million, down about 15% year over year. The reported efficiency ratio was 63.81%, compared with 49.72%. Return on average assets was 1.09% versus 1.48%, and return on average equity was 13.86% versus 19.01%.
- Balance sheet at June 30: Total assets were $13.16 billion; loans and leases $5.35 billion; deposits $9.98 billion; shareholders’ equity $1.00 billion.
- Funding and liquidity: Cash and cash equivalents were $657.2 million; available-for-sale securities were $4.11 billion. Securities sold under repurchase agreements totaled $1.87 billion. Long-term debt was $30.7 million. Management described liquidity and capital as strong.
- Cash flow, first half: Operating activities provided $95.8 million; investing activities used $22.2 million; financing activities used $24.0 million. Cash and cash equivalents increased $49.6 million to $657.2 million.
- Credit: The loan-loss allowance was $145.0 million, or 2.71% of loans, versus $147.4 million, or 2.76%, at year-end. Nonperforming assets were $34.2 million, down from $37.8 million; the NPA ratio was 0.64% versus 0.71%. Q2 net charge-offs were $6.0 million, or 0.45% of average loans, versus $14.9 million, or 1.09%, a year earlier.
- Capital and shareholder returns: The company reported regulatory capital ratios of 17.96% Tier 1, 19.23% total capital, and 7.07% Tier 1 leverage, and said the company and Bank remained well capitalized. The quarterly dividend remained $0.45 per share. First-half repurchases totaled approximately $50.8 million; the board later authorized an additional $120 million of repurchase capacity.
Material changes and drivers
- Q2 net income fell 25% year over year; first-half net income fell 22%. Lower securities-sale gains, reduced net interest income, lower overdraft fees, and higher other expenses outweighed the benefit of lower credit-loss provisions.
- No investment securities were sold in Q2 2011, compared with $15.0 million of net gains in Q2 2010. First-half net securities gains were $6.1 million versus $35.0 million.
- Net interest income fell 6% in Q2 and 7% in the first half. Management attributed the decline mainly to lower asset yields, including lower loan yields and a larger balance of lower-yielding securities; lower deposit costs partly offset this pressure. Average loan balances declined year over year, while average securities balances rose.
- Deposit-account service-charge income fell 37% in Q2, primarily because of lower overdraft fees following Regulation E opt-in requirements and processing changes. Overdraft fees were $5.1 million in Q2, down 50% year over year.
- Other noninterest expense included a $9.0 million accrual for a tentative overdraft-fee class-action settlement. The settlement, reached July 15 and subject to documentation and court approval, was accrued in Q2.
- In Q1, the company reclassified approximately $2.2 billion of available-for-sale securities to held-to-maturity, citing intent and ability to hold them to maturity. No gain or loss was recognized on transfer; related unrealized after-tax gains remain in accumulated other comprehensive income and will be amortized over time.
Outlook, commentary, and risks
Management said Hawaii’s economy continued to improve, supported by stronger visitor arrivals and spending, while remaining cautious about the pace of recovery, interest rates, and loan demand. The company planned to focus on customer service, productivity, capital management, and disciplined underwriting. It expected further pressure on fee-based revenue; it did not provide numerical earnings guidance.
- The Federal Reserve’s debit-card interchange pricing and routing rules were scheduled to take effect October 1, 2011. The company was still refining its estimate of the income impact; Q2 debit interchange fees were approximately $6.6 million.
- Management identified residential home building, residential land, home equity, air transportation leases, and lending on neighbor islands as comparatively higher-risk exposures. It also cited economic and tourism sensitivity, unemployment, housing conditions, oil prices, interest-rate changes, and potential credit deterioration.
- Other risks include regulatory and compliance costs, including Dodd-Frank and Basel III; litigation; competition; and changes in capital or liquidity requirements. The company reported no material change in other risk factors from its 2010 Form 10-K.
- In July 2011, the company received a $3.4 million partial recovery on a previously charged-off leveraged lease; management said it would consider the recovery in its September 30 allowance assessment.
- The company’s Hawaii overdraft-fee lawsuit settlement remained subject to court approval. Other ordinary-course legal proceedings were disclosed; management could not determine whether claims or indemnification obligations might affect results in a future period.
Important facts for investors to verify
- Whether the $9.0 million overdraft settlement received final documentation and court approval, and whether the accrued amount covered the ultimate cost.
- The realized effect of the October 2011 debit-interchange rules on fee income, product pricing, and customer behavior.
- Whether net interest margin and loan demand stabilized, given lower asset yields and ongoing loan paydowns.
- Whether credit-quality improvements continued, particularly in residential mortgage, home equity, neighbor-island, and air-transportation exposures, and whether the allowance remained adequate.
- How the held-to-maturity reclassification and planned repurchases affected securities flexibility, capital ratios, and shareholder returns.