BANK OF HAWAII CORP annual report, FY2023

Bank of Hawaii Corporation — 2023 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023, with fourth-quarter comparisons where disclosed. Bank of Hawaii is a regional bank holding company serving Hawaii, Guam, and other Pacific Islands through Consumer Banking, Commercial Banking, and Treasury and Other.

Financial performance and key metrics

Metric	2023	2022
Net income	$171.2 million	$225.8 million
Diluted earnings per share	$4.14	$5.48
Net interest income	$497.0 million	$540.6 million
Net interest margin, taxable-equivalent	2.24%	2.50%
Noninterest income	$176.6 million	$157.5 million
Noninterest expense	$437.5 million	$415.3 million
Net cash provided by operating activities	$150.2 million	$333.0 million

Net income fell 24%; return on average assets was 0.71%, down 27 basis points. Return on average shareholders’ equity was 12.63%, versus 16.10%.
Interest income rose, but interest expense increased sharply as deposit and borrowing costs climbed. Average interest-bearing deposit cost increased to 1.74% from 0.30%.
Noninterest income rose 12%, including a $14.7 million gain on extinguishment of repurchase agreements. Noninterest expense increased 5%, including a $14.7 million FDIC special assessment.
At year-end, assets were $23.7 billion, loans and leases $14.0 billion, deposits $21.1 billion, and shareholders’ equity $1.4 billion. Loans grew 2% and deposits 2% year over year.
Cash and cash equivalents were $1.0 billion. The company reported $6.4 billion of remaining Federal Reserve borrowing capacity and $2.5 billion of remaining FHLB capacity.
Regulatory capital remained above well-capitalized thresholds: company CET1 ratio 11.33%, total capital ratio 13.60%, and Tier 1 leverage ratio 7.51%.
Credit quality remained low-risk by reported delinquency measures: nonperforming assets were $11.7 million, or 0.08% of loans and foreclosed real estate. Net charge-offs were $7.8 million, or 0.06% of average loans. The allowance for loan losses was $146.4 million, 1.05% of loans.
Annual common dividends were $2.80 per share. The board declared a $0.70 quarterly common dividend in January 2024. The company suspended program share repurchases in April 2023 amid banking-sector turmoil.

Material changes versus the prior comparable period

Net interest income declined $43.5 million as higher funding costs more than offset higher asset yields; margin compressed 26 basis points.
Noninterest income increased $19.1 million, driven mainly by the repurchase-agreement extinguishment gain and comparison with a prior-year leased-asset sale loss. Securities losses also increased, to $11.5 million from $6.1 million.
FDIC insurance expense rose to $28.3 million from $6.5 million, including the $14.7 million special assessment.
Commercial loans and leases grew 6%, led by commercial and industrial lending; consumer loans and leases were broadly unchanged.
Deposits increased $439 million, while estimated adjusted uninsured deposits were $8.9 billion. Time deposits increased to $3.1 billion from $1.7 billion.
Investment securities totaled $7.4 billion at carrying value, down about 10%. Gross unrealized losses were approximately $1.0 billion; management attributed them primarily to interest rates, stated it did not intend to sell the securities, and said a forced sale before recovery was not considered likely.
Fourth-quarter net income was $30.4 million, versus $61.3 million a year earlier; diluted EPS was $0.72 versus $1.50. Fourth-quarter net interest margin was 2.13%, down 47 basis points year over year.

Outlook, commentary, risks, and unusual items

Management said its 2023 focus on strengthening the balance sheet should position the company to deliver strong results in 2024; the filing provides no specific company earnings or margin guidance.
Management expected Hawaii visitor arrivals to remain flat in 2024 and return to moderate growth in 2025. The Maui wildfire recovery remains uncertain; wildfire-affected customer loans totaled $154.9 million at year-end, with estimated potential loss of about $11 million.
The FDIC special assessment is payable in eight quarterly installments beginning in June 2024. Following the FDIC’s higher loss estimate, the company expected an additional assessment around June 2024 but said it was not expected to be material.
Key risks include interest-rate and deposit-cost pressure, liquidity and uninsured-deposit confidence, regional economic exposure to tourism and the military, Maui recovery and natural disasters, credit deterioration, commercial real estate conditions, competition, regulation, and cybersecurity or vendor disruption. No material cybersecurity incident was reported for 2023.
Unfunded commitments to extend credit were $3.43 billion; standby and commercial letters of credit totaled about $105 million. Affordable-housing partnership unfunded commitments were $101.1 million. The company reported ordinary-course legal matters and said their resolution was not expected to materially affect results, while noting outcomes remain uncertain.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter because of judgment involved in qualitative adjustments.

Important facts for investors to verify

Whether deposit mix, time-deposit pricing, and funding costs stabilize enough to support net interest margin and earnings.
How the FDIC special assessment changes in 2024 and whether additional costs remain immaterial.
Actual credit performance and reserve needs, especially commercial and industrial exposures, consumer charge-offs, and Maui-affected borrowers.
The practical liquidity and capital impact of unrealized securities losses, including the securities’ fair values and available borrowing capacity.
Progress in Maui recovery and effects on tourism, collateral values, borrowers, and the company’s estimated wildfire loss.
Future dividend and repurchase decisions, which depend on capital, regulatory limits, and market conditions.