BANK OF HAWAII CORP quarterly report, Q3 FY2023

Bank of Hawaii Corporation — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results. The company provides banking and financial services primarily in Hawaii and the West Pacific.

Financial performance and position

Metric	Q3 2023	Comparable period / balance-sheet date
Net interest income	$120.9 million	$141.7 million in Q3 2022
Net interest margin	2.13%	2.60% in Q3 2022
Net income	$47.9 million	$52.8 million in Q3 2022
Diluted EPS	$1.17	$1.28 in Q3 2022
Noninterest income	$50.3 million	$30.7 million in Q3 2022
Noninterest expense	$105.6 million	$105.7 million in Q3 2022

For the first nine months, net income was $140.8 million versus $164.5 million in 2022; diluted EPS was $3.42 versus $3.98. Net interest income was $381.2 million versus $399.8 million.
Net interest income fell as increased asset yields were more than offset by higher funding costs. Q3 interest expense was $91.0 million versus $13.3 million a year earlier; deposit expense was $72.2 million versus $10.3 million.
Q3 noninterest income included a $14.7 million gain from terminating repurchase agreements and $6.7 million of net investment-security losses. The company also recorded a $4.6 million realized loss from securities sales during the quarter.
At September 30, total assets were $23.55 billion; loans and leases were $13.92 billion, up 2% from year-end 2022; deposits were $20.80 billion, up 0.9%; and shareholders’ equity was $1.36 billion, up 3.6%.
Deposits shifted toward higher-cost funding: time deposits rose to $2.66 billion from $1.71 billion at year-end 2022. Noninterest-bearing demand deposits declined to $5.69 billion from $6.71 billion.
Cash and cash equivalents were $652.2 million at September 30. Nine-month operating cash flow was $124.6 million, down from $268.9 million in 2022. Investing activities provided $463.7 million; financing activities used $337.8 million.
Other debt totaled $560.2 million, including $550 million of FHLB advances. Repurchase agreements were $150.5 million, down from $725.5 million at year-end 2022. The company borrowed $1.4 billion from the FHLB in the first half and terminated $1.2 billion of advances in Q3.
Regulatory capital ratios were 11.29% CET1, 12.53% Tier 1, 13.56% total capital, and 7.22% Tier 1 leverage. Management reported that the company remained “well-capitalized.”

Changes, credit quality, and material items

Q3 return on average common equity was 15.38%, compared with 16.98% in Q3 2022. The effective tax rate rose to 24.76% from 20.68%.
The allowance for credit losses on loans and leases was $145.3 million, or 1.04% of loans, at September 30. Q3 provision for credit losses was $2.0 million; net charge-offs were $2.0 million, or 0.06% annualized. The allowance included a qualitative overlay for economic uncertainty and recession risk.
Nonperforming assets were $11.5 million, or 0.08% of loans and foreclosed real estate. Accruing loans 90 days or more past due were $6.7 million, up from $5.4 million at year-end 2022.
The securities portfolio’s carrying value was $7.5 billion, down 9% from year-end. Gross unrealized losses across the portfolio were approximately $1.3 billion; management attributed losses primarily to interest rates, stated it did not intend to sell impaired-position securities, and said it was not more likely than not that it would have to sell them before recovery.
In August 2023, Maui wildfires affected borrowers representing $169.2 million of loans, approximately 1% of the portfolio. Management estimated potential loss exposure of $10.8 million and reported $136.4 million in facilities under wildfire-related payment deferrals at September 30. The allowance considered wildfire impacts, insurance, and collateral values.
The company reported $6.1 billion of remaining borrowing capacity at the Federal Reserve Discount Window and BTFP, and $2.5 billion at the FHLB. It said it had not accessed the BTFP.

Outlook, risks, and other disclosures

The filing provides no specific earnings or financial guidance. Management said the broader Hawaii economy remained relatively resilient, but Maui faced significant disruption; it expected statewide job growth to slow through 2024 and rebound in 2025 as rebuilding begins.
Management identified interest rates, funding costs, deposit competition, recession risk, credit quality, banking-industry disruption, tourism and wildfire effects, liquidity and capital access, cybersecurity and operational risks, regulation, and litigation as risks that could affect results.
The board declared a quarterly common dividend of $0.70 per share. Remaining share-repurchase authorization was approximately $126.0 million; no shares were repurchased under the program in Q3.
Legal proceedings were described as arising in the normal course of business. Management said outcomes were not expected to be materially in excess of recorded reserves, while noting unexpected developments could produce materially greater losses. No material changes to previously reported risk factors were noted apart from the added discussion of recent financial-industry events.

Important facts for investors to verify

Whether deposit pricing and funding costs continue to pressure net interest income and margin, including the pace of deposit migration into time deposits.
Liquidity and capital resilience under stress, including availability and terms of contingent borrowing capacity and the scale and maturity of uninsured deposits.
How Maui wildfire-related deferrals perform and whether insurance proceeds and collateral values support the company’s $10.8 million estimated potential loss.
Credit trends in consumer portfolios, particularly auto, installment, mortgage, and home-equity loans, and the adequacy of reserves as charge-offs normalize.
The effect of securities sales, unrealized losses, and any further balance-sheet or hedging actions on earnings and capital.
The sustainability of reported earnings excluding the $14.7 million repurchase-agreement extinguishment gain and other unusual or period-specific items.