BOH

Business Context and Reporting Period

Company: Bank of Hawaii Corporation (BOH)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: BOH is a Delaware bank holding company headquartered in Honolulu, Hawaii. Its primary subsidiary, Bank of Hawaii, provides diversified banking, leasing, insurance, and investment services primarily in Hawaii and the Pacific Islands (Guam, American Samoa). The company divested most foreign operations by the end of 2001 and completed a major Information Technology Systems Replacement Project in 2003.

Key Financial Metrics (Year Ended Dec 31, 2003)

Material Changes vs. Prior Period

• Profitability: Net income increased 11.5% to $135.2 million, driven by a 24 basis point improvement in Net Interest Margin (NIM) to 4.23% and a reduction in non-interest expenses. Diluted EPS rose 30% to $2.21.
• Loan Loss Provision: The company recorded no provision for loan and lease losses in 2003, compared to $11.6 million in 2002, due to improved credit quality and economic conditions.
• Expense Management: Non-interest expenses decreased 3% to $357.9 million. Excluding the Systems Replacement Project costs, expenses dropped 6% year-over-year.
• Capital Structure: Shareholders' equity declined 22% to $793.1 million, primarily due to $330.0 million in stock repurchases and $50.6 million in dividends paid.
• Asset Quality: Non-performing assets (NPAs) decreased significantly to $31.7 million (0.55% of total loans), down from $54.4 million (1.01%) in 2002. Net charge-offs were $13.8 million (0.25% of average loans), down from $27.7 million in 2002.

Guidance, Outlook, and Risks

2004-2006 Strategic Plan

In January 2004, the company announced a new three-year plan focusing on revenue growth in island markets, business integration, and operating efficiency. Management estimates 2004 net income to be approximately $157 million.

• Provision Outlook: Based on current conditions, the company does not expect to record a provision for loan losses in 2004, though this is subject to quarterly credit risk assessments.
• Share Repurchases: The company has $119.5 million remaining in buyback authority (as of Feb 20, 2004) under a $1.0 billion total authorization.

Risks and Contingencies

• Credit Risk Concentrations: While overall asset quality improved, the company notes higher risk characteristics in the air transportation industry and the Guam portfolio (dependent on tourism and military spending).
• Market Risk: The company is exposed to interest rate risk. A 200 basis point increase in rates is estimated to increase Net Interest Income by $14.6 million, while a 200 basis point decrease would reduce it by $17.6 million.
• Technology Costs: The company entered a seven-year outsourcing agreement with Metavante Corporation for technology services, with estimated future payments of approximately $52.2 million.

Investor Verification Checklist

• Stock Repurchase Impact: Verify the remaining $119.5 million buyback authority and its potential impact on future EPS and equity levels.
• Credit Quality in Guam: Review the specific exposure in the Guam portfolio ($435.6 million outstanding) and the impact of tourism/military spending fluctuations.
• Airline Exposure: Assess the $129.9 million outstanding in air transportation loans and the industry's ongoing cost/competition challenges.
• Systems Replacement Savings: Confirm the realization of the projected $17.0 million annual cost savings from the Metavante technology outsourcing agreement.
• Dividend Restrictions: Note that future dividends from the Bank subsidiary to the parent company require regulatory approval due to prior special dividends used for buybacks.