Bank of Hawaii Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; year-over-year comparisons are to Q1 2021 unless otherwise noted. Balance-sheet comparisons are to December 31, 2021. The unaudited filing covers the company’s banking operations in Hawaii, Guam, and other Pacific Islands.
Key financial results
| Metric | Q1 2022 | Comparable period / change |
|---|---|---|
| Net interest income | $125.3 million | Up 3.9% year over year |
| Net interest margin | 2.34% | 2.43%, down 9 basis points |
| Noninterest income | $43.6 million | $43.0 million, up 1.4% |
| Noninterest expense | $103.9 million | $98.9 million, up 5.1% |
| Net income | $54.8 million | $59.9 million, down 8.5% |
| Net income available to common shareholders | $52.9 million | $59.9 million |
| Diluted EPS | $1.32 | $1.50 |
| Common dividend declared per share | $0.70 | $0.67 |
| Efficiency ratio | 61.53% | 60.45% |
| Return on average assets / common equity | 0.97% / 15.44% | 1.15% / 17.65% |
The provision for credit losses was a net benefit of $5.5 million, versus a $14.3 million benefit in Q1 2021. The effective tax rate was 22.15%, compared with 24.09%.
Balance sheet, liquidity, and capital
- Total assets were $23.0 billion, up 1.0% from year-end 2021. Loans and leases were $12.54 billion, up 2.3%; deposits were $20.72 billion, up 1.7%.
- Investment securities totaled approximately $8.75 billion. Cash and cash equivalents were $595.1 million. Management cited high liquidity; additional borrowing capacity was $3.0 billion from the FHLB and $714.8 million from the Federal Reserve, subject to pledged collateral.
- Reported debt included $450.5 million of securities sold under repurchase agreements and $10.4 million of other debt, primarily finance lease obligations.
- Shareholders’ equity fell $162.7 million, or about 10%, to $1.45 billion. The main pressure was $179.8 million of after-tax other comprehensive loss, largely unrealized investment-security losses; dividends and share repurchases also reduced equity.
- Regulatory ratios remained above well-capitalized thresholds: CET1 11.83%, Tier 1 13.22%, total capital 14.41%, and Tier 1 leverage 7.30% at March 31, 2022.
- Operating cash flow was $41.8 million, down from $182.4 million in Q1 2021. Investing activities used $321.4 million and financing activities provided $314.2 million; cash and cash equivalents ended the quarter at $595.1 million.
Material changes and credit quality
- Loan growth was led by home equity, commercial mortgage, and residential mortgage lending. PPP balances declined $69.0 million to $57.8 million, mainly from SBA forgiveness payments.
- Mortgage banking income declined 53% to $2.7 million, primarily because of lower conforming mortgage loan sales. Higher deposit service charges and other income partly offset the decline.
- Allowance for credit losses on loans and leases was $152.0 million, or 1.21% of loans, compared with $157.8 million, or 1.29%, at year-end. Net charge-offs were $1.5 million, or 0.05% annualized of average loans.
- Nonperforming assets were $20.0 million, or 0.16% of loans and foreclosed real estate, versus $19.0 million, or 0.15%, at year-end. Nonaccrual loans and leases were $17.6 million.
- Unrealized losses on investment securities increased substantially as interest rates rose. Gross unrealized losses were $614.7 million at quarter-end, primarily on government-agency and government-sponsored mortgage-backed securities. Management attributed the losses mainly to rates, stated it did not intend to sell the securities, and did not consider them credit impaired.
Outlook, risks, and contingencies
- The filing provides no formal earnings or financial guidance. Management’s interest-rate simulation estimated that a gradual +100 basis-point move would raise annual net interest income 2.1%, and an immediate +100 basis-point move would raise it 5.0%; falling rates were modeled to reduce income. These are estimates dependent on assumptions, and a flatter or inverted yield curve could reduce net interest income.
- Management described the Hawaii economy as recovering, while noting continuing pandemic effects. It cited a 4.1% state unemployment rate in March 2022 and strong year-over-year Oahu home-price increases. Tourism weakness, COVID-19 developments, interest-rate changes, credit quality, regulation, competition, cyber or operational disruption, natural disasters, and litigation are among the stated risks.
- Credit commitments totaled $3.25 billion, including $3.09 billion of unfunded commitments to extend credit; these amounts are not necessarily expected cash outflows. Legal proceedings arise in the ordinary course; management did not expect outcomes to materially exceed reserves based on information available, but unexpected developments could produce larger losses.
- The company repurchased 116,787 shares under its program for $10.0 million and paid $28.3 million of common dividends and $2.0 million of preferred dividends during the quarter. The board declared a $0.70 common dividend in April. The filing reported no material change in risk factors from the 2021 Form 10-K.
Important facts for investors to verify
- Whether loan growth and deposit funding continue, and whether deposit pricing or mix changes as rates rise; estimated uninsured deposits were $10.8 billion.
- How the sizable unrealized securities losses affect tangible and regulatory capital, and whether securities sales or liquidity needs could crystallize losses.
- Whether credit performance remains consistent with the declining allowance, including trends in nonperforming assets, delinquencies, and COVID-related modified loans.
- Whether expense growth and weaker mortgage banking revenue continue to pressure earnings and the efficiency ratio.
- How actual net interest income responds to rate changes versus the filing’s simulation, including the effects of yield-curve shape and deposit repricing.