Business Context and Reporting Period
Company: Bank of Hawaii Corporation (formerly PacificCentury Financial Corporation)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2002
Overview: The Company is a financial services organization focused on Retail Banking, Commercial Banking, Investment Services, and Treasury operations. The reporting period reflects the completion of major divestitures in 2001 and a strategic shift to strengthen operations in Hawaii and the West Pacific. The Company is currently executing a seven-year Information Technology Systems Replacement Project (ITSRP) with Metavante Corporation.
Key Financial Metrics
| Metric | Q3 2002 | Q3 2001 | 9M 2002 | 9M 2001 |
|---|---|---|---|---|
| Net Income | $30.2 million | $31.1 million | $92.3 million | $91.5 million |
| Diluted EPS | $0.43 | $0.37 | $1.26 | $1.11 |
| Net Interest Income | $92.2 million | $111.8 million | $280.0 million | $353.6 million |
| Net Interest Margin | 4.03% | 3.89% | 3.97% | 3.91% |
| Non-Interest Income | $48.2 million | $113.4 million | $151.2 million | $371.8 million |
| Non-Interest Expense | $93.0 million | $122.6 million | $275.7 million | $456.2 million |
| Provision for Loan Losses | $0 | $0.9 million | $11.6 million | $59.8 million |
| Total Assets | $9.70 billion | $11.94 billion | $9.70 billion | $11.94 billion |
| Total Deposits | $6.63 billion | $7.40 billion | $6.63 billion | $7.40 billion |
| Shareholders' Equity | $1.10 billion | $1.37 billion | $1.10 billion | $1.37 billion |
| Return on Average Assets (ROAA) | 1.22% | 1.00% | 1.22% | 0.94% |
| Return on Average Equity (ROAE) | 10.40% | 8.88% | 10.10% | 8.96% |
Material Changes vs. Prior Period
- Earnings: Net income for Q3 2002 decreased slightly (2.8%) compared to Q3 2001, but Diluted EPS increased 16.2% due to significant share repurchases. Year-to-date net income increased slightly ($0.8 million) despite the absence of large one-time gains recorded in 2001.
- Divestitures Impact: The 2001 period included $144.7 million in gains from the sale of the credit card portfolio and Pacific Century Bank branches, and $20.9 million from a stock exchange. These non-recurring items significantly inflated 2001 non-interest income.
- Asset Quality: Non-performing assets declined 40.5% year-over-year to $63.3 million. The ratio of non-performing assets to total loans dropped to 1.20% from 1.56%. Consequently, no provision for loan losses was recorded in Q3 2002.
- Balance Sheet Contraction: Total assets decreased by $2.2 billion year-over-year, driven by the divestiture of foreign operations and a managed reduction of the loan portfolio to improve credit quality. Foreign loans dropped from $825.8 million in 2001 to $38.2 million in 2002.
- Cost Structure: Non-interest expense decreased significantly year-over-year due to divestitures and lower incentive compensation. However, $6.6 million in expenses related to the IT Systems Replacement Project were incurred in Q3 2002.
Guidance, Outlook, and Risks
- Earnings Outlook: Management expects full-year 2002 earnings to equal or exceed $120 million. Q4 earnings are expected to approximate Q3 levels, potentially decreasing slightly due to IT project costs and seasonal expenses.
- IT Systems Replacement: The Company entered a seven-year outsourcing arrangement with Metavante Corporation. Total transition charges are estimated at $35 million over five quarters. The project is expected to be operational in Q3 2003, with projected annual cost savings of over $17 million.
- Capital Management: The Company maintains a "well-capitalized" status with a Tier 1 Capital Ratio of 18.55% and Total Capital Ratio of 21.96%. A $300 million stock repurchase program was approved in 2002; as of September 30, 2002, $102 million of authority remained.
- Market Risks:
- Interest Rate Risk: The Company is asset-sensitive. A 200 basis point increase in rates is estimated to increase net interest income by $7.0 million per quarter.
- Credit Risk: Concentrations exist in Air Transportation ($152 million exposure) and Lodging ($287 million exposure). Management notes that while the Hawaii economy is resilient, the Guam economy remains in recession.
- Foreign Exchange: Exposure is minimal following divestitures, with a Value-at-Risk of only $0.02 million.
Investor Verification Checklist
- Continuing Business Performance: Verify the "Continuing Business" metrics (excluding divestitures and restructuring) which show a Net Income of $34.4 million for Q3 2002, an increase of $3.0 million over the prior year.
- IT Project Costs: Monitor the remaining $28.9 million in expected transition costs for the IT Systems Replacement Project and the timeline for achieving the projected $17 million annual savings.
- Loan Portfolio Quality: Confirm the stability of the allowance for loan losses (2.94% of loans) given the reduction in provisions and the specific exposure to the tourism-dependent lodging and airline sectors.
- Share Repurchases: Track the execution of the remaining $102 million in stock repurchase authority and its impact on future EPS.
- Dividend Policy: Note the quarterly dividend increase to $0.19 per share and the payout ratio relative to earnings.