Bank of Hawaii Corporation — 2017 Form 10-K Summary
Business context and reporting period
Bank of Hawaii Corporation is a bank holding company headquartered in Honolulu. Through its principal bank subsidiary, it provides banking and related financial services primarily in Hawaii, Guam, and other Pacific Islands. This filing reports the fiscal year ended December 31, 2017; quarterly figures below compare the fourth quarter of 2017 with the fourth quarter of 2016.
Management described Hawaii’s economy as healthy in 2017, supported by tourism, low unemployment, rising real estate prices, and construction. Visitor arrivals rose 5.0% and visitor spending rose 6.2% year over year.
Financial performance and condition
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net interest income | $457.2 million | $417.6 million | Up 9% |
| Net interest margin | 2.93% | 2.83% | Up 10 basis points |
| Noninterest income | $185.4 million | $197.3 million | Down 6% |
| Provision for credit losses | $16.9 million | $4.8 million | Higher by $12.2 million |
| Noninterest expense | $357.7 million | $350.6 million | Up 2% |
| Net income | $184.7 million | $181.5 million | Up 2% |
| Diluted earnings per share | $4.33 | $4.23 | Up 2% |
| Return on average assets / equity | 1.10% / 15.27% | 1.15% / 15.79% | Both lower |
| Efficiency ratio | 55.66% | 57.01% | Improved |
Net interest income growth reflected increased earning assets, especially loans, and a higher margin as loans made up a larger share of earning assets. Average loans and leases grew 12% to $9.35 billion; higher deposit costs partly offset asset yield gains. Mortgage banking income fell 35% to $12.9 million, primarily on lower conforming loan sales and margins.
At year-end, loans and leases were $9.80 billion, up 9%; deposits were $14.88 billion, up 4%; total assets were $17.09 billion, up 4%; and shareholders’ equity was $1.23 billion, up 6%. The allowance for loan and lease losses was $107.3 million, or 1.10% of loans, versus $104.3 million, or 1.17%, a year earlier. Net charge-offs rose to $13.8 million, or 0.15% of average loans, from $3.4 million, or 0.04%. Nonperforming assets declined 18% to $16.1 million, and were 0.16% of loans and foreclosed real estate.
Operating cash flow was $175.1 million, compared with $226.5 million in 2016. Investing activities used $1.02 billion, primarily reflecting loan growth and securities purchases; financing activities provided $415.0 million. Cash and cash equivalents declined $431.8 million to $447.9 million. Available-for-sale securities were $2.23 billion. Management also reported $2.0 billion of additional FHLB borrowing capacity and $529.8 million of additional FRB capacity, subject to available collateral.
Year-end funding included $14.88 billion of deposits, $505.3 million of repurchase agreements, and $260.7 million of other debt. Other debt was primarily $250 million of FHLB advances, with maturities from 2018 to 2020. The Bank and Company were classified as well capitalized: the Company’s Common Equity Tier 1 ratio was 13.24%, total capital ratio 14.46%, and Tier 1 leverage ratio 7.26%.
Material changes and fourth-quarter results
- Net income increased modestly despite the materially higher credit-loss provision and weaker noninterest income. Loan growth and margin expansion were the main earnings supports.
- Mortgage banking income declined to $12.9 million from $19.9 million; other noninterest income also decreased, including lower customer swap fees and gains on leased assets.
- Credit costs rose as net charge-offs increased, notably in automobile and other consumer portfolios. Nonperforming assets nevertheless fell, mainly due to improvement in consumer loans.
- Fourth-quarter net income was $43.0 million, down 1% year over year; diluted EPS was $1.01, also down 1%. Quarterly net interest income on a taxable-equivalent basis rose 10% to $121.6 million and NIM increased to 2.98%. Higher credit provision, lower mortgage banking income, and higher taxes offset revenue growth.
Outlook, commentary, risks, and unusual items
The filing provides no overall earnings or revenue guidance. Management expected the 2018 effective tax rate to be 20%–22%, excluding nonrecurring transactions, following the federal corporate tax-rate reduction from 35% to 21%. The company recorded a $3.6 million fourth-quarter 2017 tax expense to remeasure deferred tax balances; management said the accounting remained provisional and could be refined.
Key exposures include dependence on Hawaii and Pacific Island economies, tourism and military spending; interest-rate and funding-cost movements; credit deterioration and real estate collateral values; competition; regulatory change; and operational, vendor, cybersecurity, and reputational risks. The company’s interest-rate simulation estimated that a gradual +200-basis-point move would increase annual net interest income by 2.6%, while a gradual -100-basis-point move would reduce it by 1.4%; actual outcomes depend on assumptions and deposit and loan behavior.
Notable items include $10.4 million of net investment securities gains, largely related to Visa Class B share sales, including a $12.1 million gain in the first quarter. Remaining Visa shares were carried at zero cost; possible conversion-ratio reductions and related indemnification are subject to Visa litigation. Two customer class actions concerning overdraft practices were pending; the company disputed the allegations, was defending the cases, and could not reasonably estimate potential loss, so it recorded no liability. Management said other known legal matters were not expected to materially affect results, while noting unexpected developments could be material.
The company paid $87.1 million in dividends and repurchased $47.1 million of shares in 2017. In January 2018, the board declared a quarterly dividend of $0.52 per share. Management cautioned that future dividends and repurchases depend on capital, regulatory limits, market conditions, and board decisions. The financial-statement auditor gave an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether credit costs and consumer-loan charge-offs continue to rise as the loan portfolio expands, and whether the allowance remains adequate.
- Whether loan growth and NIM gains persist as deposit pricing responds to interest-rate changes.
- The final tax-reform accounting and whether the projected 2018 effective tax rate of 20%–22% is achieved.
- The progress, potential exposure, and any eventual loss estimate for the overdraft class actions and Visa-related indemnification.
- Liquidity and capital headroom after loan growth, shareholder distributions, and upcoming debt and time-deposit maturities.