Bank of Hawaii Corporation — Q3 2011 Form 10-Q
Business context and period. Bank of Hawaii Corporation is a bank holding company headquartered in Honolulu, serving Hawaii, Guam, and other Pacific Islands. This unaudited filing covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods unless otherwise noted. Dollar figures below are in millions except per-share data and ratios.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $96.8 | $98.6 | $294.0 | $310.2 |
| Provision for credit losses | $2.2 | $13.4 | $10.5 | $50.0 |
| Noninterest income | $50.9 | $63.1 | $154.2 | $203.8 |
| Noninterest expense | $84.0 | $89.9 | $263.8 | $257.5 |
| Net income | $43.3 | $44.1 | $120.8 | $143.4 |
| Diluted EPS | $0.92 | $0.91 | $2.54 | $2.96 |
- Revenue and margins: Net interest margin was 3.09% in Q3 versus 3.27% a year earlier, and 3.16% for the first nine months versus 3.50%. Lower asset yields, including on loans and investments, were partly offset by lower deposit funding costs. Q3 efficiency ratio was 56.87% versus 55.57%; nine-month ratio was 58.86% versus 50.10%.
- Balance sheet at September 30: Total assets were $13.30 billion, loans and leases $5.35 billion, deposits $10.01 billion, shareholders’ equity $1.02 billion, and long-term debt $30.7 million. Securities sold under repurchase agreements totaled $1.93 billion. Cash and cash equivalents were $452.5 million; available-for-sale securities were $4.45 billion and held-to-maturity securities $2.52 billion.
- Credit quality: Allowance for loan and lease losses was $143.4 million, or 2.68% of loans, down from $147.4 million, or 2.76%, at year-end 2010. Net charge-offs were $3.7 million (0.28% annualized) in Q3 and $14.4 million (0.36%) year to date, substantially below 2010. Nonperforming assets were $37.8 million, essentially unchanged from year-end; nonaccrual loans were 0.64% of loans versus 0.67%.
- Cash flow, nine months: Operating activities provided $182.5 million, investing activities used $350.5 million, and financing activities provided $13.0 million. Cash and cash equivalents declined $155.1 million to $452.5 million.
- Capital and shareholder returns: The Company and Bank were reported as “well capitalized.” Tier 1 capital ratio was 17.57%, total capital ratio 18.83%, and Tier 1 leverage ratio 6.95%. The company repurchased 1.84 million shares for $82.4 million in the first nine months and paid $64.0 million in dividends; declared dividends were $0.45 per share per quarter.
Material changes versus comparable periods
- Q3 net income fell 2%; nine-month net income fell 16%. Q3 diluted EPS edged up from $0.91 to $0.92 as average diluted shares declined, while year-to-date diluted EPS decreased from $2.96 to $2.54.
- Noninterest income declined 19% in Q3 and 24% year to date. Lower securities gains and overdraft fees were major factors; Q3 2011 had no investment-security sales, compared with $7.9 million of net gains in Q3 2010. Nine-month securities gains were $6.1 million versus $42.8 million.
- Credit-loss provision fell sharply, reflecting lower charge-offs and nonperforming assets. Q3 noninterest expense fell 7%, partly because Q3 2010 included $5.2 million of early termination costs on repurchase-agreement funding. Nine-month noninterest expense increased 2%, including the $9.0 million overdraft-litigation settlement accrual.
- Loans were nearly flat versus year-end 2010, while deposits increased $120 million. Investment securities increased $308 million. In Q1, the company transferred approximately $2.2 billion of available-for-sale securities to held-to-maturity; no gain or loss was recognized at transfer.
Outlook, commentary, risks, and unusual items
- Management described Hawaii’s economy as improving, citing visitor activity, but remained cautious about the slow recovery, interest rates, and weak loan demand. It emphasized disciplined underwriting, liquidity, capital, customer service, productivity, and capital management. The filing provides no specific earnings or full-year financial guidance.
- Management expected the Durbin Amendment’s debit-card pricing and routing rules, effective October 1, 2011, to reduce revenue by approximately $4.0 million in Q4 2011. It also anticipated continued pressure on fee-based revenues and ongoing regulatory compliance costs.
- Key risks cited include economic weakness in Hawaii and nationally, tourism exposure, interest-rate and securities-market changes, competition, regulation including Dodd-Frank and Basel requirements, credit quality and reserve estimates, litigation, and operational or cybersecurity disruptions. The company noted higher-risk exposures in residential home building and land, home equity, air-transportation leases, and neighbor-island lending.
- A $9.0 million overdraft-fee class-action settlement was accrued in Q2 and paid to the fund administrator in September after initial court approval. Other legal proceedings were not expected by management to have a material adverse effect on financial position, though future-period effects could not be determined.
- Investment securities in unrealized loss positions totaled $3.8 million of gross unrealized losses; management attributed these mainly to interest-rate changes and did not consider them other-than-temporary impairments. The filing also disclosed exposure to the financial condition of the Federal Home Loan Bank through $61.3 million of FHLB stock; no impairment was recorded.
- Interest-rate simulations showed estimated 12-month net interest income rising 3.9% under an immediate +200-basis-point parallel shift and declining 7.1% under an immediate -100-basis-point shift. These are model estimates, not forecasts; a flattening or inverted yield curve could also reduce income.
Most important facts for investors to verify
- Whether expected Durbin-related revenue reductions and broader fee pressure are offset by cost actions, account growth, or other income.
- Whether falling net interest margin and weak loan demand persist, and how investment-portfolio repositioning affects yields and interest-rate sensitivity.
- Whether credit-quality improvement continues, especially in residential real estate, home equity, commercial borrowers, and air-transportation exposures; monitor charge-offs, delinquencies, TDRs, and reserve adequacy.
- Whether the overdraft settlement receives final approval and whether further litigation or mortgage-servicing repurchase claims arise.
- Liquidity and funding composition, including the $1.93 billion in repurchase agreements, their maturities and counterparties, and the ability to maintain strong capital under evolving regulatory requirements.