Business context and reporting period
Bank of Hawaii Corporation’s Form 10-K covers the fiscal year ended December 31, 2016; it also reports fourth-quarter results. The company is a Honolulu-based bank holding company serving Hawaii, Guam and other Pacific Islands through Retail Banking, Commercial Banking, Investment Services, and Treasury and Other. Its financial statements were audited by Ernst & Young, which issued an unqualified opinion; the auditor also reported effective internal control over financial reporting.
Key financial metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net interest income | $417.6 million | $394.1 million |
| Noninterest income | $197.3 million | $186.2 million |
| Noninterest expense | $350.6 million | $348.1 million |
| Provision for credit losses | $4.8 million | $1.0 million |
| Net income | $181.5 million | $160.7 million |
| Diluted earnings per share | $4.23 | $3.70 |
| Return on average assets / equity | 1.15% / 15.79% | 1.06% / 14.82% |
| Net interest margin (taxable-equivalent) | 2.83% | 2.81% |
| Efficiency ratio | 57.01% | 59.99% |
- Growth and balance sheet: Total assets were $16.5 billion, up 7%; loans and leases were $8.95 billion, up 14%; deposits were $14.32 billion, up 8%. Investment securities totaled $6.0 billion, down 4%, as the company redirected some proceeds toward loans.
- Credit quality: Nonperforming assets fell 31% to $19.8 million; nonaccrual loans and leases were 0.20% of loans, versus 0.36% a year earlier. The allowance for loan and lease losses was $104.3 million, or 1.17% of loans, versus $102.9 million, or 1.31%, in 2015. Net charge-offs were $3.4 million, or 0.04% of average loans, compared with $6.8 million, or 0.09%.
- Capital and liquidity: Company regulatory ratios were 13.24% Common Equity Tier 1 and Tier 1, 14.49% total capital, and 7.21% Tier 1 leverage; the Bank was also classified as well capitalized. Cash and cash equivalents were $879.6 million, and available-for-sale securities were $2.19 billion. The company reported $1.7 billion of additional FHLB borrowing capacity and $625.7 million of available FRB credit capacity, subject to collateral.
- Funding and debt: Other debt was $267.9 million, including $250 million in FHLB advances. Repurchase agreements totaled $523.4 million and funds purchased were $9.6 million. Repurchase agreements with private institutions carried a weighted-average rate of 4.14% and weighted-average maturity of 3.0 years.
- Cash flow: Operating activities provided $226.5 million, investing activities used $960.9 million, and financing activities provided $858.2 million. Cash and cash equivalents increased by $123.9 million during the year to $879.6 million.
- Shareholder returns: The company paid $81.2 million in cash dividends and repurchased $61.8 million of stock in 2016. Dividends declared were $1.89 per share, up from $1.80. In January 2017, the board declared a quarterly dividend of $0.50 per share.
Material changes versus prior comparable periods
- FY 2016 net income rose 13% and diluted EPS rose 14% year over year. Net interest income increased 6%, largely reflecting loan and deposit growth and a modestly higher margin.
- Mortgage banking income increased 72% to $19.9 million, driven by more conforming loan sales and higher origination and refinancing activity. Other noninterest income rose 27%, including higher gains on leased assets and customer interest-rate swap fees.
- Noninterest expense rose 1%. The comparison benefited from the absence of a $9.5 million aircraft impairment recorded in 2015; all six aircraft were sold in 2016 at a nominal loss on their reduced carrying value. Salaries and benefits increased 5%.
- The provision for credit losses increased to $4.8 million from $1.0 million. Commercial recoveries, including recovery of one commercial and industrial loan, partly offset higher consumer net charge-offs.
- Loans and deposits both expanded materially, while the investment portfolio contracted. Capital ratios declined year over year, with the company citing balance-sheet growth; the company remained above the stated well-capitalized thresholds.
- Fourth-quarter 2016 net income was $43.5 million, up 2% from fourth-quarter 2015; diluted EPS was $1.02, up 3%. Taxable-equivalent net interest income increased 5%, while the quarterly net interest margin was 2.83%, down 2 basis points year over year.
Outlook, commentary, risks and unusual items
- Management described Hawaii’s 2016 economy as healthy, citing tourism growth, low unemployment, rising real-estate prices and active construction. Visitor arrivals increased 3.0% and spending 4.2% year over year. No specific full-year 2017 earnings or revenue guidance is provided.
- Management’s interest-rate simulation showed estimated annual net interest income increasing 4.1% under a gradual +200-basis-point scenario and declining 2.5% under a gradual -100-basis-point scenario. Under immediate shocks, the corresponding estimates were +10.4% and -6.4%. These are modeled sensitivities, not forecasts; a flatter or inverted yield curve could reduce income.
- Key exposures include dependence on Hawaii and Pacific Island economies, tourism and U.S. military activity; interest-rate and credit risk; real-estate collateral and construction exposure; competition; regulation and compliance costs; cyber and operational disruptions; and natural disasters. The loan portfolio is concentrated geographically, with 91% of loans in Hawaii.
- Two purported customer class actions filed in 2016 and January 2017 concern overdraft practices. The company disputes wrongdoing and is defending the cases; it stated that potential loss could not be reasonably estimated and recorded no liability. Management says other pending legal matters are not expected to materially affect results, but unexpected developments could produce material losses.
- Other notable items include an $11.2 million first-quarter gain on sale of Visa Class B shares, which contributed to total net investment-securities gains of $10.2 million. The remaining 180,914 Visa Class B shares were carried at zero cost basis; the related conversion ratio remains subject to Visa litigation and possible adjustment. In the fourth quarter, mortgage banking income included a $2.2 million mortgage-servicing-rights valuation impairment recovery.
- The company corrected an immaterial prior-year cash-flow presentation error without changing net cash provided by operating or investing activities, earnings, or balance-sheet amounts. It expects the new lease standard to affect reported assets and liabilities, and expects the expected-credit-loss standard (CECL) to affect its credit-loss reserve; the amounts were not yet determined.
Important facts for investors to verify
- Whether loan and deposit growth can continue without weakening underwriting quality, funding costs or the allowance coverage ratio.
- How rising, falling or changing yield-curve conditions affect net interest margin and actual results versus the filing’s modeled rate sensitivities.
- Whether the improvement in nonperforming assets and charge-offs persists as consumer portfolios season and commercial exposures grow.
- The eventual outcome and potential financial impact of the overdraft class actions, Visa-related contingencies, and mortgage representation-and-warranty obligations.
- The effects of CECL implementation on reserves and earnings, and of lease-accounting changes on reported assets and liabilities.
- The sustainability of dividends and repurchases, which depend on Bank dividends, regulatory limits, capital needs and board decisions.