Bank of Hawaii Corporation — Q1 2016 Form 10-Q
Business context and reporting period. Bank of Hawaii Corporation is a bank holding company headquartered in Honolulu, serving Hawaii, Guam, and other Pacific Islands. This unaudited quarterly report covers the three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015, and income comparisons are to Q1 2015.
Key financial results and condition
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $103.0 million | $96.8 million in Q1 2015; up 6% |
| Net interest margin | 2.86% | 2.81% in Q1 2015 |
| Noninterest income | $56.2 million | $52.3 million in Q1 2015; up 7% |
| Noninterest expense | $87.4 million | $86.9 million in Q1 2015 |
| Net income | $50.2 million | $42.4 million in Q1 2015; up 18% |
| Diluted EPS | $1.16 | $0.97 in Q1 2015; up 20% |
| Declared dividend per share | $0.45 for Q1 | Board declared $0.48 in April for the next quarterly dividend |
| Total assets | $15.65 billion | $15.46 billion at December 31, 2015 |
| Loans and leases | $8.07 billion | $7.88 billion at December 31, 2015; up 2% |
| Deposits | $13.49 billion | $13.25 billion at December 31, 2015; up 2% |
| Shareholders’ equity | $1.14 billion | $1.12 billion at December 31, 2015 |
| Other debt | $220.8 million | $245.8 million at December 31, 2015 |
- Credit and asset quality: The company recorded a $2.0 million negative provision for credit losses, principally reflecting recovery of previously charged-off loans from one Guam commercial client. Net recoveries were $3.8 million. The allowance for loan and lease losses was $104.7 million, or 1.30% of loans, versus $102.9 million, or 1.31%, at year-end. Nonperforming assets declined to $22.0 million from $28.8 million; the nonperforming-assets ratio fell to 0.27% from 0.37%.
- Cash flow and liquidity: Operating cash flow was $42.4 million, investing cash flow was negative $136.4 million, and financing cash flow was $132.9 million. Cash and cash equivalents ended the quarter at $794.7 million. Available-for-sale securities were $2.3 billion. The company reported additional borrowing capacity of $1.2 billion from the FHLB and $585.6 million from the Federal Reserve, based on pledged collateral.
- Capital: The company reported a 13.85% Common Equity Tier 1 ratio, 15.10% total capital ratio, and 7.25% Tier 1 leverage ratio; it and the Bank were classified as well-capitalized. Ratios were modestly lower than at year-end for several measures.
- Shareholder returns: The company repurchased 342,733 shares for $21.5 million and paid $19.5 million in dividends. The board added $100 million to repurchase authorization in March; remaining authority was $104.3 million at quarter-end.
Material changes and drivers
- Higher earnings reflected loan and lease growth, higher deposits and earning assets, and the $1.3 million interest recovery from the Guam client. Average loans and leases rose to $7.94 billion from $7.05 billion in Q1 2015.
- Noninterest income increased $3.9 million. Key items included an $11.2 million gain on sale of Visa Class B shares, compared with $10.2 million of investment securities gains in Q1 2015, and a $1.9 million gain on sale of equipment leases.
- Noninterest expense rose only $0.5 million overall. Lower occupancy expense included a $1.5 million gain on Guam real estate; higher other expense included a $0.5 million increase in the reserve for unfunded commitments.
- Trust and asset management income declined $0.9 million, while mortgage banking income increased $1.5 million, partly because more conforming mortgage production was sold.
- Deposits grew mainly from commercial and consumer core deposits. Loan growth included commercial and industrial, construction, home equity, and auto lending. The company continued reducing Ginnie Mae mortgage-backed securities and redeploying proceeds primarily into loans.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no specific full-year earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results. Management described Hawaii’s economy as positive, citing tourism, real estate, and construction activity. It does not anticipate further Visa Class B share sales in 2016.
- Interest-rate risk: The company’s simulation estimated that a gradual 100-basis-point rate increase would raise next-12-month net interest income by 1.8%, while a 100-basis-point decline would reduce it by 2.4%. Immediate parallel changes produced larger modeled impacts: +5.0% for a 100-basis-point increase and −7.0% for a decline. A flattening or inverted yield curve could reduce income.
- Regional and portfolio concentration: Lending is concentrated in Hawaii and the Pacific Islands, and much of the real estate lending is secured by Hawaii property. Management identifies adverse impacts to Hawaii tourism and local economic conditions among the risks to results.
- Credit and commitments: Total credit commitments were $2.69 billion, including $2.61 billion of unfunded commitments; these may not be fully drawn. Affordable-housing partnership unfunded commitments were $23.5 million. TDR loans totaled $60.8 million. Management judged reserves adequate, but estimates and actual credit outcomes may differ.
- Legal and mortgage-related exposures: The company faces ordinary-course legal proceedings; management said outcomes were not expected to materially exceed reserves, while noting unexpected developments could produce larger losses. It reported no mortgage repurchases or pending repurchase requests during the quarter and no liability for repurchase losses, but warned requests could increase. Investor representation-and-warranty exposure related to $2.5 billion of sold residential mortgages.
- Unusual and potentially nonrecurring earnings: Q1 included Visa share-sale gains, a Guam property-sale gain, equipment lease-sale gains, and a large recovery from one Guam borrower. Management said the Visa gain arose from a restricted-share sale and that further sales were not anticipated in 2016.
Most important facts for investors to verify
- How much of the earnings increase is sustainable after excluding Visa, property, equipment-lease, and loan-recovery gains?
- Whether loan growth, funding costs, and net interest margin continue to support earnings under changing rates and deposit competition.
- Trends in nonperforming assets, consumer charge-offs, TDR performance, and allowance adequacy as the portfolio grows.
- Exposure to Hawaii and Pacific-region economic conditions, especially tourism and real estate, and concentration in mortgage-backed securities.
- Whether liquidity, regulatory capital, and shareholder returns remain appropriate as repurchases, dividends, and credit commitments evolve.
- Potential developments in mortgage repurchase claims, legal proceedings, Visa litigation and conversion terms, and regulatory requirements.