Bank of Hawaii Corporation — Q3 2022 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2022. Bank of Hawaii provides consumer and commercial banking, lending, trust and investment services primarily in Hawaii, Guam and other Pacific Islands; most lending is concentrated in Hawaii. Comparisons below are with Q3 or the first nine months of 2021, as applicable. Balance-sheet comparisons are with December 31, 2021.
Financial performance and condition
| Metric | Q3 2022 | Comparable / period-end reference |
|---|---|---|
| Net interest income | $141.7 million | Up 12% from Q3 2021 |
| Net interest margin | 2.60% | 2.32% in Q3 2021 |
| Net income | $52.8 million | $62.1 million in Q3 2021; down 15% |
| Diluted EPS | $1.28 | $1.52 in Q3 2021 |
| Common dividend declared | $0.70 per share | $0.70 in Q3 2021 |
| Total assets | $23.1 billion | Up 1.5% from year-end 2021 |
| Loans and leases | $13.3 billion | Up 8.7% from year-end 2021 |
| Deposits | $20.9 billion | Up 2.6% from year-end 2021 |
| Shareholders’ equity | $1.28 billion | Down $329 million, or 20%, from year-end 2021 |
| Allowance for credit losses on loans | $146.4 million; 1.10% of loans | $157.8 million at year-end 2021; 1.29% |
| Nonperforming assets | $13.9 million; 0.10% of loans and foreclosed real estate | $19.0 million at year-end 2021; 0.15% |
| Cash and cash equivalents | $655.6 million | $655.96 million at September 30, 2021 |
- Profitability and expenses: Q3 pretax income was $66.6 million, versus $82.1 million a year earlier. Noninterest income fell 26% to $30.7 million, while noninterest expense rose 10% to $105.7 million. The efficiency ratio was 61.37%, compared with 57.38%.
- Credit costs: The income statement reports no Q3 provision for credit losses (rounded); the detailed reserve activity shows a small net benefit. For the first nine months, the provision was an $8.0 million benefit, versus a $40.8 million benefit in 2021. Q3 net charge-offs were $1.1 million, or 0.03% annualized of average loans.
- Nine-month results: Net income was $164.5 million versus $189.5 million; diluted EPS was $3.98 versus $4.70. Net interest income was $399.8 million versus $370.9 million. Operating cash flow was $268.9 million; investing activities used $552.5 million and financing activities provided $378.9 million.
- Funding, debt and liquidity: Total deposits were $20.9 billion. Repurchase-agreement borrowings were $425.5 million and other debt was $10.3 million, primarily finance lease obligations. The company reported $3.1 billion of additional FHLB borrowing capacity and $608.1 million from the Federal Reserve based on pledged collateral. Estimated uninsured deposits were $11.1 billion.
- Capital: The company said it remained “well-capitalized.” Preliminary regulatory ratios at September 30 were 11.42% CET1, 12.72% Tier 1, 13.82% total capital and 7.28% Tier 1 leverage. Common-stock repurchases cost $39.5 million in the nine-month cash flow statement; management reported 435,283 shares repurchased under the program for $34.9 million, at an average $80.14 per share.
Material changes and unusual items
- Higher market rates and loan growth lifted Q3 net interest margin. Loan balances grew particularly in commercial mortgage, residential mortgage and home equity; deposits also increased. Deposit interest expense rose as rates increased.
- Q3 noninterest income included a $6.9 million pretax loss tied to an agreement to sell assets and terminate certain leveraged leases, completing the company’s exit from that market. Mortgage banking income also declined as sales of conforming loans fell.
- Occupancy expense was higher partly because the prior-year period benefited from a property sale. Salary and benefit costs also increased.
- Investment securities had $1.12 billion of gross unrealized losses at September 30, versus $142.8 million at year-end 2021, primarily reflecting rising interest rates. The company transferred approximately $1.3 billion of available-for-sale securities to held-to-maturity; approximately $176.7 million of related after-tax unrealized losses remained in accumulated other comprehensive loss to be amortized over the securities’ estimated lives. The company said it did not consider the unrealized losses to be credit-related and did not intend, nor expect to be required, to sell the securities before recovery.
- Accumulated other comprehensive loss increased to $447.7 million from $66.4 million at year-end 2021, a major contributor to the decline in reported shareholders’ equity. The filing also reports deferred tax assets increased by $144.8 million, primarily due to temporary differences associated with unrealized securities losses.
- The company declared a $0.70 common dividend in October, payable December 14, 2022. The filing provides no quantified earnings or revenue guidance.
Outlook, risks and contingencies
Management said Hawaii visitor arrivals were near pre-pandemic levels and described job growth and tourism recovery as supportive of the local economy; restored international flights and eased travel restrictions were expected to contribute to improvement. Management also noted declining Oahu home-sale volumes but higher median prices in the first nine months of 2022. Its rate-sensitivity model estimated that a gradual 200-basis-point increase could raise future annual net interest income by 3.3%, while a gradual 100-basis-point decrease could reduce it by 1.3%; these are model estimates, not guidance. A flattening or inverted yield curve could also reduce net interest income.
- Key disclosed risks include interest-rate changes, credit deterioration, Hawaii tourism and economic conditions, lingering COVID-19 effects, liquidity and capital costs, competition, regulatory and accounting changes, cybersecurity and operational disruptions, natural disasters, and litigation or regulatory investigations.
- The company had $3.66 billion of total credit commitments, including $3.51 billion of unfunded commitments to extend credit. These are not necessarily future cash requirements because commitments may expire undrawn.
- Management said pending and threatened legal matters arose in the ordinary course and believed eventual outcomes would not be materially in excess of recorded reserves, while acknowledging unexpected developments could produce materially greater losses.
- Controls and procedures were assessed as effective as of September 30, 2022; the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit pricing and funding costs keep pace with asset-yield increases, and how that affects net interest margin and earnings.
- The size, duration and accounting treatment of securities’ unrealized losses, including the implications of the $1.3 billion transfer to held-to-maturity and the resulting reduced flexibility to sell those assets.
- Whether loan growth and local economic conditions alter credit quality, required reserves, charge-offs or concentrations in Hawaii real estate and tourism-sensitive sectors.
- The composition and stability of deposits, including the reported $11.1 billion of estimated uninsured deposits and the company’s liquidity under stressed conditions.
- The recurring cost and earnings effects of the leveraged-lease exit, lower mortgage banking activity, higher operating expenses and ongoing share repurchases and dividends.
- Regulatory capital ratios are preliminary, and the filing states that interim results are not necessarily indicative of full-year or future results.