Bank of Hawaii Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. Bank of Hawaii provides financial services primarily in Hawaii, Guam, and other Pacific Islands. Results are unaudited.
Financial performance and condition
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $88.6 million | $97.9 million in Q1 2012; down 10% |
| Net interest margin | 2.82% | 3.06% in Q1 2012; down 24 basis points |
| Net income | $36.0 million | $43.8 million in Q1 2012; down 18% |
| Diluted EPS | $0.81 | $0.95 in Q1 2012 |
| Noninterest income / expense | $47.8 million / $84.4 million | $48.1 million / $85.2 million in Q1 2012 |
| Efficiency ratio | 61.90% | 58.35% in Q1 2012 |
| Loans and leases | $5.78 billion | $5.85 billion at year-end; down 1% |
| Deposits | $11.25 billion | $11.53 billion at year-end; down 2% |
| Total assets / shareholders’ equity | $13.53 billion / $1.03 billion | $13.73 billion / $1.02 billion at year-end |
| Long-term debt | $177.4 million | $128.1 million at year-end |
| Allowance for loan and lease losses | $126.9 million, or 2.19% of loans | $128.9 million, or 2.20%, at year-end |
| Cash and cash equivalents | $283.4 million at quarter-end | $352.9 million at start of quarter |
Q1 operating cash flow was $27.9 million, investing cash flow was positive $108.7 million, and financing cash flow was negative $206.1 million. Net cash decreased $69.5 million. The quarterly dividend declared was $0.45 per share, unchanged from Q1 2012. Regulatory capital ratios at March 31 were 16.12% Tier 1, 17.38% total capital, and 6.90% Tier 1 leverage; the company reported itself and the Bank as “well capitalized.”
Material changes and management commentary
- Earnings declined mainly because lower yields on loans and investment securities reduced net interest income. Management expected margin pressure to continue as higher-yielding assets run off in the low-rate environment.
- Noninterest income was nearly flat year over year. Higher mortgage banking income ($6.4 million, up 27%) from refinancing activity partly offset lower other income. Q1 2012 included a $3.5 million pretax gain from an early buyout of two cargo-ship leveraged leases and a related $2.7 million tax benefit.
- Noninterest expense fell 1%; salaries and benefits rose 4%, largely because separation expense increased by $1.1 million. The efficiency ratio worsened by 3.55 percentage points.
- No provision for credit losses was recorded in Q1 2013, compared with $0.4 million in Q1 2012. Net charge-offs were $2.0 million, down from $3.4 million; management cited improving credit quality and the Hawaii economy and said the allowance could decline further if improvement or stability continues.
- Nonperforming assets increased to $38.4 million from $37.1 million; the NPA ratio rose to 0.66% from 0.63%. Residential mortgage non-accrual loans increased, partly reflecting the lengthy judicial foreclosure process. Higher-risk exposures include residential land loans, certain home-equity loans, and air-transportation leases.
- Deposits fell mainly because of lower public time deposits. The company received a $50 million FHLB advance at 0.60%, maturing in February 2016; it reported additional borrowing capacity of $1.1 billion from the FHLB and $686.6 million from the Federal Reserve based on pledged collateral.
- Management described liquidity and capital as strong, continued share repurchases, and emphasized expense control and maintaining liquidity, credit reserves, and capital. The Board declared a $0.45 quarterly dividend in April, payable June 14, 2013.
Outlook, risks, and contingencies
Management cited a strengthening Hawaii economy, including increased visitor arrivals and spending, but remained cautious about local and national economic conditions, interest rates, and regulation. Interest-rate simulations indicated that a gradual +200-basis-point change could increase annual net interest income by 2.4%, while a gradual -100-basis-point change could reduce it by 2.1%; a flatter or inverted yield curve could also reduce income. These are model estimates, not guidance.
Key risks include continued net interest margin compression; economic or tourism weakness in Hawaii; credit deterioration, especially in identified higher-risk loan and lease categories and neighbor-island markets; regulatory changes, including Basel III and Dodd-Frank requirements; operational, cybersecurity, litigation, and market risks. The company had no direct European sovereign exposure and described non-sovereign European exposure as low risk. It reported no pending mortgage repurchase requests at quarter-end and no material liability for repurchase losses, while noting requests could increase. Total unfunded credit commitments and letters of credit were $2.16 billion; commitments may expire undrawn. Management said pending and threatened legal proceedings were not expected to exceed accrued amounts materially, though unexpected developments could affect a particular period.
Important facts for investors to verify
- Whether net interest margin and earnings continue to decline as assets reprice in the low-rate environment.
- Whether credit quality improves enough to support further allowance reductions, particularly given rising nonperforming assets and residential mortgage delinquencies.
- Deposit trends and funding costs, including the mix and maturities of repurchase-agreement funding and the new FHLB advance.
- The sensitivity of securities values, accumulated other comprehensive income, and regulatory capital to interest-rate changes.
- Whether mortgage repurchase demands, regulatory compliance costs, or operational and cybersecurity events create material losses.
- Whether share repurchases and dividends remain consistent with capital, liquidity, and regulatory requirements.