Business context and reporting period
Bank of Hawaii Corporation’s Form 10-K covers the fiscal year ended December 31, 2015, with 2014 as the principal comparison. The company provides consumer and commercial banking, leasing, trust, investment and related services, primarily in Hawaii, Guam and other Pacific Islands. Its results are particularly exposed to those local economies and to tourism, real estate and military spending.
Key financial and operating metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Net interest income | $394.1 million | $379.7 million |
| Net interest margin | 2.81% | 2.85% |
| Noninterest income | $186.2 million | $180.0 million |
| Noninterest expense | $348.1 million | $326.9 million |
| Net income | $160.7 million | $163.0 million |
| Diluted EPS | $3.70 | $3.69 |
| ROA / ROE | 1.06% / 14.82% | 1.14% / 15.50% |
| Efficiency ratio | 59.99% | 58.41% |
| Loans and leases at year-end | $7.9 billion | $6.9 billion |
| Deposits at year-end | $13.3 billion | $12.6 billion |
Net interest income increased 4%, mainly from higher average earning assets and loan growth; margin declined four basis points as loan and securities yields remained under pressure. Total revenue—net interest income plus noninterest income—was approximately $580.3 million, up from $559.7 million. Net income fell about 1%, while diluted EPS edged up as average shares outstanding declined.
Net cash provided by operating activities was $234.0 million; investing activities used $531.1 million, largely reflecting loan growth; and financing activities provided $517.2 million. Cash and cash equivalents increased $220.1 million to $755.7 million. The company reported $628.9 million of repurchase agreements and $245.8 million of other debt at year-end. Available borrowing capacity was reported at $1.1 billion from the FHLB and $560.8 million from the Federal Reserve, subject to available collateral.
Total shareholders’ equity was $1.12 billion. The company’s year-end Basel III capital ratios were 13.97% Common Equity Tier 1 and Tier 1, 15.22% total capital, and 7.26% Tier 1 leverage; the Bank was classified as well capitalized. The allowance for loan and lease losses was $102.9 million, or 1.31% of loans, versus $108.7 million, or 1.58%, in 2014. Nonperforming assets were $28.8 million, 0.37% of loans, leases and foreclosed real estate, versus $30.1 million, 0.44%. Net charge-offs rose to $6.8 million from $1.9 million.
Material changes versus 2014
- Loans and leases grew 14%; deposits rose 5%. Consumer lending increased 16% and commercial lending 12%.
- Noninterest expense rose 6%, driven in part by a $9.5 million aircraft impairment, higher salaries and benefits, and technology and insurance costs. Net occupancy expense fell, partly because of gains on property sales.
- The provision for credit losses was $1.0 million, compared with a $4.9 million recovery in 2014. The prior-year recovery reflected credit improvements and significant commercial recoveries.
- Mortgage banking income increased to $11.6 million from $7.6 million as the company sold more conforming mortgage loans. Net investment securities gains were $10.2 million, primarily from selling Visa Class B shares, compared with $8.1 million in 2014.
- The securities portfolio’s carrying value declined 8% to $6.2 billion as the company reduced some holdings and shifted funds toward loans. Shareholders’ equity increased 6%; the company paid $78.4 million in dividends and repurchased $50.2 million of shares under its repurchase program.
Outlook, commentary, risks and unusual items
Management described Hawaii’s 2015 economy as healthy, citing tourism growth, low unemployment, rising property prices and active construction. It emphasized balanced growth, customer service, risk management and capital flexibility. The filing provides no specific earnings, revenue or margin guidance for 2016.
Key risks include dependence on Hawaii and Pacific Island economic conditions; interest-rate and net-interest-margin sensitivity; credit deterioration, including real-estate collateral and consumer lending risks; regulatory and compliance costs; cybersecurity and operational disruptions; and natural disasters. Management’s year-end interest-rate simulations estimated that a gradual +200-basis-point change could raise annual net interest income by 2.7%, while a gradual -100-basis-point change could reduce it by 1.7%; outcomes depend on assumptions, and a flattening or inverted yield curve could reduce income.
Unusual items included the $9.5 million impairment of six aircraft being marketed for sale, a $10.1 million Visa Class B share-sale gain, gains on branch and Guam property sales, and tax benefits from energy investments. The company reported $2.67 billion in unfunded credit commitments and letters of credit; these are not necessarily expected cash outflows. Visa-related indemnification and mortgage representation-and-warranty exposures remain, although no mortgage repurchase requests were pending at year-end. Management said known legal matters were not expected to materially affect results, while noting unexpected developments could be material. The financial statement audit received an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether fast loan growth—especially residential mortgage, home equity, auto and other consumer lending—continues without a rise in delinquencies, charge-offs or required reserves.
- Whether net interest margin stabilizes as asset yields, funding costs and market rates change.
- The final sale proceeds and any further impairment or loss on the six aircraft held for sale.
- The duration, termination provisions and cost of private-institution repurchase agreements, and the availability of collateral-backed borrowing capacity.
- Future capital distributions and the Bank’s capacity to pay dividends to the Parent, given regulatory limits and the Parent’s reliance on Bank dividends.
- Developments in Visa litigation/conversion terms, mortgage repurchase claims, and regulatory or cybersecurity matters.