Bank of Hawaii Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. Bank of Hawaii provides banking and financial services primarily in Hawaii, Guam, and other Pacific Islands.
Financial performance and condition
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $103.6 million | $97.8 million | $206.6 million | $194.6 million |
| Noninterest income | $46.5 million | $45.9 million | $102.7 million | $98.2 million |
| Noninterest expense | $86.1 million | $83.6 million | $173.5 million | $170.5 million |
| Net income | $44.2 million | $41.2 million | $94.5 million | $83.6 million |
| Diluted EPS | $1.03 | $0.95 | $2.19 | $1.92 |
| Net interest margin | 2.85% | 2.81% | 2.86% | 2.81% |
- Q2 net income rose 8%; first-half net income rose 13%. Reported total revenue, defined as net interest income plus noninterest income, was $150.1 million in Q2 and $309.3 million for the first half.
- Q2 return on average assets was 1.14% and return on average equity was 15.56%; first-half figures were 1.22% and 16.71%. Efficiency ratios were 57.35% and 56.08%, respectively.
- At June 30, total assets were $15.86 billion, loans and leases $8.33 billion, deposits $13.64 billion, and shareholders’ equity $1.16 billion. Loans grew 6% and deposits grew 3% from year-end 2015.
- Allowance for loan and lease losses was $103.9 million, or 1.25% of loans, versus $102.9 million, or 1.31%, at year-end. Nonperforming assets were $16.3 million, down from $28.8 million; the NPA ratio declined to 0.20% from 0.37%.
- Regulatory capital remained well-capitalized: common equity Tier 1 and Tier 1 ratios were 13.66%, total capital 14.91%, and Tier 1 leverage 7.29%. Total shareholders’ equity to assets was 7.30%.
- Cash and cash equivalents ended the half at $753.1 million. Six-month operating cash flow was negative $3.7 million, compared with positive $116.1 million in 2015; investing cash flow was negative $303.6 million and financing cash flow positive $304.7 million. Mortgage-loan originations for sale contributed to operating cash use.
- Borrowings included $586.8 million of repurchase agreements, $268.0 million of other debt, and $7.3 million of funds purchased. The company reported $1.3 billion of additional FHLB borrowing capacity and $634.9 million of additional FRB capacity based on pledged collateral.
Material changes versus comparable periods
- Net interest income increased 6% in both Q2 and the first half, driven primarily by loan growth, higher earning assets, and a modestly higher net interest margin. Loan balances grew faster than investment securities as the company shifted funds toward lending.
- Credit costs differed by period: Q2 included a $1.0 million provision, while the first half recorded a $1.0 million provision benefit, largely reflecting recovery of a previously charged-off Guam commercial loan. First-half net recoveries were $2.1 million versus net charge-offs of $2.7 million in 2015.
- Noninterest income rose 1% in Q2 and 5% in the first half. First-half results included an $11.2 million gain from selling Visa Class B shares and increased gains on mortgage-loan sales and previously leased equipment.
- Noninterest expense increased 3% in Q2 and 2% in the first half. Higher compensation and other operating costs were partly offset by real-estate sale gains and lower occupancy costs.
- Capital returned in the first half included $37.0 million of common-stock repurchases and $40.1 million of cash dividends. The declared dividend was $0.48 per share for Q2, versus $0.45 a year earlier.
Outlook, management commentary, risks, and unusual items
- Management described Hawaii’s economy as positive, citing strong tourism, real estate and construction activity, and low unemployment. The filing provides no numeric earnings or revenue guidance.
- Interest-rate modeling indicated that, over the following 12 months, a gradual +100-basis-point change could increase net interest income by 2.0%, while a gradual -100-basis-point change could reduce it by 2.6%. Immediate parallel shocks showed larger modeled effects; actual results depend on assumptions and balance-sheet behavior. A flatter or inverted yield curve could reduce net interest income.
- Key risks include Hawaii economic or tourism weakness, interest-rate and securities-market changes, competition, regulatory and capital requirements, credit deterioration, litigation, cyber or operational disruptions, and natural disasters or other events affecting customers and operations.
- Unusual or nonrecurring factors included $1.0 million of Q2 interest recoveries, an additional $1.3 million first-quarter recovery on a Guam commercial exposure, $2.6 million of mortgage-servicing-rights impairment in Q2, gains on property sales, and the Visa share-sale gain. The Q2 effective tax rate of 29.77% benefited from a $1.3 million release of state tax reserves after statutes of limitation lapsed.
- Credit commitments totaled $2.73 billion, including $2.65 billion of unfunded commitments to extend credit. Management said commitments may expire undrawn. Legal proceedings are in the ordinary course; management expected outcomes not to materially exceed recorded reserves, but acknowledged losses could materially exceed reserves if developments are unexpected.
- Mortgage-loan representation-and-warranty and servicing exposures remained subject to potential repurchase claims. No related loans were repurchased and no requests were pending at June 30; management had not recorded a liability, while noting requests could increase. Visa Class B share-sale agreements may require payments if the conversion ratio is further reduced.
Important facts for investors to verify
- Whether loan and deposit growth, net interest margin, and earnings persist without the benefit of recoveries, securities gains, property-sale gains, or tax-reserve releases.
- Credit-quality trends, including consumer charge-offs, past-due accruing loans, the allowance relative to loan growth, and performance of modified loans and leases.
- The impact of interest-rate movements, mortgage prepayments, and the $2.6 million servicing-rights impairment on future mortgage-banking income.
- Funding costs, repurchase-agreement maturities and terms, liquidity capacity, and the effect of pledged collateral on available borrowing lines.
- Potential exposure from mortgage repurchase claims, legal matters, credit commitments, and Visa Class B conversion-ratio obligations.
- Capital levels and future repurchase and dividend decisions; actual timing and amount of buybacks are subject to market, regulatory, and other conditions.