Bank of Hawaii Corporation — Q2 2021 Form 10-Q
Business context and reporting period. Bank of Hawaii Corporation is a bank holding company headquartered in Honolulu, serving customers in Hawaii, Guam and other Pacific Islands. This unaudited filing covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are to December 31, 2020. The company reported that Hawaii tourism and the broader local economy continued to face effects from COVID-19.
Key financial metrics
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $123.5 | $126.7 | $244.1 | $252.7 |
| Noninterest income | $44.4 | $51.3 | $87.4 | $97.4 |
| Provision for credit losses | $(16.1) | $40.4 | $(30.4) | $74.0 |
| Income before tax | $87.5 | $48.7 | $166.5 | $90.9 |
| Net income | $67.5 | $38.9 | $127.5 | $73.7 |
| Diluted earnings per common share | $1.68 | $0.98 | $3.18 | $1.85 |
| Net interest margin | 2.37% | 2.83% | 2.40% | 2.90% |
| Efficiency ratio | 57.47% | 49.95% | 58.94% | 52.90% |
- Cash flow: For the six months, operating activities provided $211.3 million; investing activities used $1.626 billion; and financing activities provided $1.982 billion. Cash and cash equivalents ended at $1.181 billion, versus $614.1 million at year-end 2020.
- Balance sheet and liquidity: Total assets were $22.672 billion, deposits $20.170 billion, loans and leases $12.041 billion, and shareholders’ equity $1.584 billion. Compared with year-end, assets rose about 10%, deposits 11%, loans 1%, and equity 15%. Available-for-sale and held-to-maturity securities totaled about $8.471 billion.
- Debt and capital: Other debt was $10.4 million, down from $60.5 million; repurchase-agreement funding was $550.5 million, down from $600.6 million. The company reported $2.9 billion of additional FHLB borrowing capacity and $0.8 billion from the Federal Reserve. June 30 regulatory ratios were 12.36% CET1, 13.87% Tier 1, 15.13% total capital and 7.31% Tier 1 leverage; the company and bank were considered well-capitalized.
- Credit: The loan-and-lease allowance was $180.4 million, or 1.50% of loans, versus $216.3 million, or 1.81%, at year-end. Q2 net charge-offs were $1.2 million, an annualized 0.04% of average loans, compared with $5.1 million, or 0.18%, in Q2 2020. Nonperforming assets were $19.0 million, or 0.16% of loans and foreclosed real estate.
- Shareholder returns: Common dividends declared were $0.67 per share in Q2. In June, the company issued $175.5 million net of Series A preferred stock proceeds, with a 4.375% non-cumulative dividend rate. A July common dividend of $0.70 per share was declared for payment in September.
Material changes versus comparable periods
- Q2 net income increased 74% and diluted EPS increased 71% year over year; six-month net income increased 73%. The main driver was the swing from credit-loss provisions in 2020 to negative provisions (releases) in 2021, reflecting revised expected-loss estimates and the economic outlook. This was not solely an improvement in recurring revenue.
- Net interest margin fell 46 basis points in Q2 and 50 basis points for the first half, mainly due to lower yields on loans and securities. Net interest income declined 3% in Q2 and 3% for the first half.
- Noninterest income fell 13% in Q2 and 10% for the first half. Securities gains were much lower than in 2020, which included a $14.2 million gain on the sale of Visa Class B shares. Other income also declined, mainly because customer interest-rate-swap fees were lower.
- Noninterest expense rose 9% in Q2 and 6% for the first half. Salaries and benefits increased, while a $3.1 million real-estate sale gain reduced Q2 occupancy expense. Early-termination costs of $3.2 million related to prepaid repurchase agreements and FHLB advances increased other expense.
- Loans grew modestly from year-end, mainly through residential mortgages and commercial mortgages; commercial and industrial loans declined as customers paid down credit lines. Deposits increased $2.0 billion, driven by commercial and consumer balances.
- Six-month other comprehensive loss was $49.3 million, principally reflecting lower fair values of investment securities as interest rates rose. Accumulated other comprehensive income moved from $7.8 million at year-end to a $41.5 million loss.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said it plans to resume common-stock repurchases as soon as practicable, subject to market and economic conditions and applicable rules; the program had been suspended in March 2020. Remaining authorization was $113.1 million at June 30.
- Management described the credit profile as strong and improving, while continuing to monitor pandemic-related effects. COVID-related modifications not treated as troubled debt restructurings totaled $205.3 million across 118 commercial loans and leases and $13.2 million across 65 consumer loans and leases at June 30, down from $311.6 million and $178.1 million, respectively, at year-end.
- Key risks include the pace and durability of Hawaii’s tourism recovery, pandemic developments and government responses, borrower credit deterioration, interest-rate changes, securities valuation, liquidity and capital requirements, cybersecurity and operational disruptions, regulatory changes, and litigation. Management’s interest-rate simulation indicated that a gradual +100-basis-point rate change would increase annual net interest income by an estimated 2.8%, while a −100-basis-point change would reduce it by 1.5%; results depend on modeling assumptions.
- Management reported that pending legal matters were not expected, based on information available, to result in losses materially above reserves, but unexpected developments could produce materially larger losses. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Most important facts for investors to verify
- Whether earnings growth is sustainable as credit-loss reserve releases diminish, and whether loan delinquencies, modifications and charge-offs change as stimulus and deferrals roll off.
- Whether deposit growth persists and how excess liquidity and the expanded securities portfolio affect asset yields, net interest margin and interest-rate risk.
- The size and sensitivity of unrealized securities losses, including the effects on accumulated other comprehensive income and regulatory capital.
- Whether Hawaii tourism and local economic activity recover sufficiently to support borrowers, and whether pandemic-related credit risks remain concentrated in affected industries or geographies.
- The costs and terms of the new preferred stock, future preferred and common dividends, and the timing and conditions for any resumption of repurchases.
- That Q2 comparisons include unusual items, notably the 2020 Visa share-sale gain and the 2021 real-estate gain and debt-prepayment costs.