Bank of Hawaii Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results. The company provides banking and financial services in Hawaii, Guam, and other Pacific Islands; results for the quarter are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net interest income | $109.9 million | $103.0 million | +7% |
| Net interest margin | 2.89% | 2.86% | +3 basis points |
| Noninterest income | $55.9 million | $56.2 million | -1% |
| Noninterest expense | $88.6 million | $87.4 million | +1% |
| Provision for credit losses | $4.4 million | $(2.0) million | Shift from release to provision |
| Net income | $51.2 million | $50.2 million | +2% |
| Diluted EPS | $1.20 | $1.16 | +3% |
| Efficiency ratio | 53.42% | 54.88% | Improved |
| Return on average assets | 1.26% | 1.30% | Lower |
Net interest income growth reflected higher average earning assets, particularly loans, and a modestly higher margin. Total noninterest income was nearly flat: the $12.1 million net securities gain included the sale of Visa Class B shares. Lower income taxes, including a $1.9 million benefit related to share-based awards under newly adopted accounting guidance, supported earnings.
Balance sheet, liquidity and capital
- At March 31, 2017, total assets were $16.66 billion, loans and leases were $9.11 billion, and deposits were $14.48 billion. Loans increased $164 million and deposits increased $156 million from year-end 2016, largely reflecting consumer loan and deposit growth.
- Cash and cash equivalents were $743.5 million, down from $879.6 million at year-end. Q1 operating cash flow was $41.7 million; investing activities used $284.5 million and financing activities provided $106.8 million.
- Other debt was $267.9 million; securities sold under repurchase agreements were $505.3 million. The company reported $1.8 billion of additional FHLB borrowing capacity and $628.3 million of additional Federal Reserve borrowing capacity based on pledged collateral.
- Shareholders’ equity was $1.19 billion. Regulatory capital ratios were 13.41% Common Equity Tier 1, 14.66% total capital, and 7.29% Tier 1 leverage; the company and bank were classified as well-capitalized.
- The company declared $0.50 per share in dividends and repurchased 135,749 shares for $11.5 million during the quarter. Remaining repurchase authorization was $55.4 million at March 31.
Credit quality, changes and notable items
- The allowance for loan and lease losses was $105.1 million, or 1.15% of loans, versus $104.3 million and 1.17% at December 31, 2016. Net charge-offs were $3.6 million, compared with net recoveries of $3.8 million in Q1 2016; the prior-year result included a large commercial loan recovery.
- Nonperforming assets were $19.0 million, or 0.21% of loans and foreclosed real estate, down from $19.8 million and 0.22% at year-end. Accruing loans 90 days or more past due totaled $5.9 million. Consumer auto and credit-card losses contributed to higher current-period charge-offs.
- Management described Hawaii’s economy as positive, citing tourism, construction, low unemployment, and a strong real estate market. Lending is concentrated in Hawaii and the Pacific Islands; a substantial portion of real estate lending is secured by Hawaii property.
- Management reported that simulated annual net interest income would rise 3.9% under a gradual +200-basis-point rate scenario and fall 2.3% under a gradual -100-basis-point scenario. Results are model estimates, depend on assumptions, and nonparallel yield-curve changes could produce different outcomes.
- The filing provides no specific earnings or revenue guidance. Management said it did not anticipate further Visa Class B share sales during 2017. It noted that future repurchases depend on market, economic, regulatory, and other factors.
- Unusual items include the $12.1 million securities gain, primarily from the Visa share sale, and the adoption of share-based compensation accounting guidance, which reduced Q1 tax expense. The filing also describes a prior-period cash-flow presentation correction that management concluded was immaterial and did not affect income or the balance sheet.
- Risks include weaker Hawaii or tourism conditions, interest-rate and funding-cost changes, credit deterioration, regulatory or tax changes, litigation, and operational, cybersecurity, vendor, and natural-disaster risks. The company had $2.87 billion of credit commitments, including unfunded commitments; these are not necessarily expected cash outflows. It reported one pending $0.5 million mortgage repurchase request related to representations and warranties and no servicing-related pending requests.
- Expected credit loss standard CECL is scheduled for adoption in 2020; management expects it to affect the financial statements, particularly the credit-loss reserve, but had not quantified the impact.
Key facts for investors to verify
- Whether loan growth and the 2.89% net interest margin persist as deposit costs reprice and rates change.
- Whether credit provisions and consumer charge-offs remain elevated compared with the unusual prior-year commercial recovery.
- How much earnings depend on episodic Visa share-sale gains and the associated litigation/conversion-ratio exposure.
- The concentration and rate sensitivity of the investment securities and Hawaii real estate portfolios, alongside management’s liquidity and capital positions.
- The eventual CECL reserve impact, and any change in mortgage repurchase claims or legal contingencies.