Bank of Hawaii Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014 unless noted. Unaudited consolidated statements. Bank of Hawaii serves customers in Hawaii, Guam, and other Pacific Islands.
Financial performance
| Metric | Q1 2015 | Comparable period / change |
|---|---|---|
| Net interest income | $96.8 million | $93.2 million; up 4% |
| Net interest margin | 2.81% | 2.87%; down 6 basis points |
| Noninterest income | $52.3 million | $44.8 million; up 17% |
| Noninterest expense | $86.9 million | $83.5 million; up 4% |
| Net income | $42.4 million | $38.6 million; up 10% |
| Diluted EPS | $0.97 | $0.87 |
| Dividends declared per share | $0.45 | $0.45 |
| Return on average assets / equity | 1.15% / 16.18% | 1.12% / 15.15% |
| Efficiency ratio | 58.30% | 60.54% |
| Effective tax rate | 31.72% | 29.13% |
Combined net interest income and noninterest income were $149.1 million, versus $138.0 million a year earlier. Net interest income benefited from higher average loan balances, but margin contracted as yields on loans and securities declined in the low-rate environment. Noninterest income growth was chiefly attributable to a $10.2 million securities gain, including a $10.1 million gain on Visa Class B shares.
Balance sheet, liquidity, capital, and credit
- Assets and lending: Total assets were $15.14 billion, up from $14.79 billion. Loans and leases reached $7.18 billion, up $281 million (4%), with growth in commercial and residential mortgage lending.
- Funding and debt: Deposits were $12.98 billion, up $347 million. Repurchase-agreement borrowings were $672 million, down $16 million; other debt was $174 million, essentially unchanged. Other debt included $150 million of FHLB advances, with stated rates of 0.60% and maturities in 2015 and 2016.
- Liquidity: Cash and cash equivalents were $775.5 million; available-for-sale securities were $2.27 billion. The company reported unused borrowing capacity of $747.5 million at the FHLB and $647.6 million at the Federal Reserve, based on pledged collateral.
- Cash flow: Operating activities provided $39.1 million, compared with $49.2 million a year earlier; investing activities used $99.8 million, compared with $95.1 million; financing activities provided $300.7 million, compared with $127.5 million. Cash and cash equivalents increased $239.9 million to $775.5 million, mainly reflecting deposit growth.
- Capital and shareholder returns: Shareholders’ equity was $1.08 billion. The company reported a 14.62% Common Equity Tier 1 ratio, 15.87% total capital ratio, and 7.17% Tier 1 leverage ratio; it said the company and bank remained well-capitalized. It repurchased 227,226 shares for $13.1 million and paid $19.7 million in dividends. Remaining repurchase authority was $62.9 million at quarter-end.
- Credit quality: The allowance for loan and lease losses was $107.5 million, or 1.50% of loans, versus $108.7 million, or 1.58%, at year-end. No provision for credit losses was recorded in either comparative quarter. Net charge-offs were $1.2 million, or 0.07% annualized of average loans. Nonperforming assets declined to $28.8 million from $30.1 million; nonperforming assets were 0.40% of loans and foreclosed real estate. Loans 90 days or more past due and still accruing totaled $8.0 million.
Material changes and management commentary
- Net income rose 10%, with loan growth and higher noninterest income more than offsetting higher expenses and taxes. The larger Visa share-sale gain was a notable, nonrecurring contributor; management did not anticipate further Visa Class B share sales in 2015.
- Salary and benefit expense increased $2.9 million, including $1.4 million more separation expense and $0.6 million more medical, dental, and life insurance expense. The higher tax rate reflected, in part, a $1.2 million tax-reserve release in Q1 2014 following a Hawaii tax settlement.
- Management described Hawaii’s economy as positive, citing tourism, construction, low unemployment, and rising real estate prices, while noting visitor spending fell 3.3% in the first two months of 2015 despite a 0.8% increase in arrivals.
- Interest-rate simulations indicated higher net interest income under rising-rate scenarios and lower income under falling-rate scenarios. A gradual 200-basis-point increase was modeled to raise annual net interest income by 2.8%; a gradual 100-basis-point decline was modeled to reduce it by 1.8%. These are estimates based on assumptions, not guidance.
Outlook, risks, and contingencies
The filing provides no specific full-year earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results. Risks cited include Hawaii tourism and economic conditions, interest-rate and securities-market changes, competition, regulation and capital requirements, credit quality, liquidity, litigation, operational and cybersecurity events, and natural disasters.
Legal proceedings arise in the ordinary course; management said expected outcomes were not believed to exceed accrued amounts materially, while acknowledging unexpected developments could produce larger losses. There was one pending mortgage representation-and-warranty repurchase request for $0.3 million and no related repurchases during the quarter. Management had not established a repurchase-loss liability, citing historical request and loss trends. Credit commitments totaled $2.50 billion, including $2.44 billion of unfunded commitments to extend credit; amounts drawn may be lower. The company also had $26.9 million of unfunded affordable-housing investment commitments.
Important facts for investors to verify
- How much of earnings growth and noninterest income depended on the $10.1 million Visa share-sale gain, and whether it is repeatable.
- Whether loan growth can continue without weakening underwriting or increasing credit losses, particularly in Hawaii real estate and residential mortgage portfolios.
- Whether the 1.50% allowance remains adequate as loans grow; review nonaccruals, troubled debt restructurings, delinquencies, and charge-offs.
- How margin and earnings respond to rate changes, loan and securities yields, deposit costs, and the company’s sizable securities portfolio.
- Liquidity and collateral availability, including the terms and early-termination provisions of private-institution repurchase agreements.
- Capital returns, repurchase activity, and capital ratios under the phased-in Basel III requirements.
- Developments in legal matters and mortgage repurchase exposures, as well as the potential drawdown of off-balance-sheet commitments.