Bank of Hawaii Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; fourth-quarter results are also summarized. Bank of Hawaii serves consumers, businesses, and governments primarily in Hawaii, Guam, and other Pacific Islands through retail, commercial, investment/private banking, and treasury operations. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net income | $225.9 million | $219.6 million | Up 3% |
| Diluted earnings per share | $5.56 | $5.23 | Up 6% |
| Net interest income | $497.7 million | $486.4 million | Up 2% |
| Noninterest income | $183.3 million | $168.9 million | Up 9% |
| Noninterest expense | $379.2 million | $371.6 million | Up 2% |
| Provision for credit losses | $16.0 million | $13.4 million | Up $2.6 million |
| Net interest margin | 3.03% | 3.05% | Down 2 basis points |
| Return on average assets / equity | 1.29% / 17.65% | 1.29% / 17.63% | ROA unchanged; ROE up 2 basis points |
| Efficiency ratio | 55.68% | 56.71% | Improved |
Higher net interest income reflected growth in earning assets and loans, partly offset by higher deposit funding costs. Mortgage banking income rose 62% to $13.7 million, primarily from increased sales and margins on conforming loans. The effective tax rate increased to 20.96% from 18.73%, mainly reflecting a reduced benefit from municipal bonds sold in a portfolio repositioning.
Fourth-quarter 2019 net income was $58.1 million, up 8% year over year, and diluted EPS was $1.45, up 12%. Quarterly net interest margin was 2.95%, down 15 basis points year over year.
Balance sheet, liquidity, and capital
- Total assets were $18.1 billion, up 6%; loans and leases were $11.0 billion, up 5%; and deposits were $15.8 billion, up 5% from year-end 2018.
- Shareholders’ equity was $1.29 billion, up 1%. Company regulatory capital ratios were 12.18% Common Equity Tier 1, 12.18% Tier 1, 13.28% total capital, and 7.25% Tier 1 leverage. The Bank was classified as well capitalized.
- Cash and cash equivalents were $558.7 million. Available-for-sale securities had a carrying value of $2.6 billion. The Bank reported additional borrowing capacity of $2.5 billion from the FHLB and $533.5 million from the Federal Reserve, based on pledged collateral.
- Total deposits were the principal funding source. Other debt was $85.6 million, including $75.0 million of FHLB advances; repurchase-agreement borrowings were $604.3 million.
- Cash from operating activities was $234.2 million, versus $317.9 million in 2018. Investing activities used $773.3 million, versus $74.7 million, while financing activities provided $571.7 million, versus using $165.1 million. Cash and cash equivalents increased $32.7 million to $558.7 million.
- The Company paid $105.5 million in cash dividends and repurchased $137.6 million of common stock in 2019. The annual dividend declared was $2.59 per share.
Material changes and notable items
- Commercial and consumer lending expanded. Commercial mortgage loans increased 9% and residential mortgages increased 6%; loan growth was partly offset by a 31% decline in lease financing.
- Nonperforming assets increased 56% to $20.1 million, from $12.9 million, primarily due to commercial mortgage loans. Nonaccrual loans and leases were 0.16% of total loans, versus 0.11%. Net charge-offs declined to $12.7 million, or 0.12% of average loans, from $14.1 million, or 0.14%.
- The allowance for loan and lease losses increased to $110.0 million, but declined as a proportion of loans to 1.00% from 1.02%. The filing describes the reserve as appropriate to the portfolio and then-stable Hawaii economy.
- The Company repositioned its securities portfolio, including reducing municipal holdings and transferring $1.0 billion of prepayable securities from held-to-maturity to available-for-sale. Net investment-securities losses were $4.0 million.
- Equipment expense increased 23% to $29.3 million, including higher depreciation, software-license, and maintenance costs. FDIC insurance expense fell 33% to $5.2 million after the temporary surcharge ended.
- In December 2019, the Company agreed to an $8.0 million settlement fund for overdraft litigation, subject to court approval; it increased its reserve for the matter to $8.0 million.
- Effective January 1, 2020, the Company adopted the expected-credit-loss standard (CECL). Based on the portfolio and economic expectations at year-end, management estimated the day-one reserve would decrease 2%–7%; the commercial allowance was expected to decline and consumer allowance to increase. The final adjustment was still being completed.
Outlook, commentary, and risks
Management characterized Hawaii’s 2019 economy as stable, citing low interest rates, a healthy construction sector, and increased visitor arrivals. It described its approach as balancing growth with prudent risk and capital management. The filing provides no quantified earnings or revenue guidance.
The filing specifically warned that COVID-19-related travel concerns and restrictions could reduce tourism and customer income in Hawaii, with effects that were difficult to forecast and potentially material. Other key risks include the Company’s geographic concentration in Hawaii and the Pacific Islands; tourism, military spending, real estate, and construction exposure; interest-rate and deposit-cost changes; credit deterioration; the LIBOR transition; regulatory and compliance costs; cyber and operational disruptions; natural disasters; litigation; and competition.
Interest-rate simulations showed annual net interest income sensitivity at year-end 2019 of +3.4% for a gradual +200-basis-point move and -1.8% for a gradual -100-basis-point move; an immediate +200-basis-point move was estimated to increase it 8.2%. These are model estimates, not guidance. Management noted that a flatter or inverted yield curve could reduce net interest income.
Other contingencies include mortgage-sale representations and warranties and servicing obligations. The Company repurchased three mortgage loans totaling $0.9 million in 2019, with no material losses and no pending representation-and-warranty repurchase requests at year-end. Management said known legal matters were not expected to materially affect results, while acknowledging that unexpected developments could lead to material losses. The financial-statement and internal-control audits received unqualified opinions.
Investor verification priorities
- Track the realized effects of COVID-19 on Hawaii tourism, borrowers, credit quality, and earnings; the filing did not quantify this exposure.
- Review subsequent asset-quality trends, particularly the increase in commercial mortgage nonaccruals and nonperforming assets, and assess reserve coverage relative to loan growth.
- Confirm the final CECL day-one adjustment and its subsequent effect on credit-loss provisions and retained earnings.
- Check court approval and final costs of the overdraft litigation settlement, and monitor other legal and regulatory contingencies.
- Assess net interest margin, deposit pricing, liquidity, and realized rate sensitivity against management’s model assumptions.
- Evaluate continued dividends and repurchases in light of regulatory limits and the Parent’s reliance on Bank dividends. The Board declared a $0.67 quarterly dividend in January 2020 and authorized an additional $100 million of repurchases.