Bank of Hawaii Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Bank of Hawaii serves customers primarily in Hawaii, Guam, and other Pacific Islands through retail, commercial, investment-services, and treasury businesses.
Financial performance and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net interest income | $379.7 million | $358.9 million | +6% |
| Net interest margin | 2.85% | 2.81% | +4 basis points |
| Noninterest income | $180.0 million | $186.2 million | -3% |
| Noninterest expense | $326.9 million | $331.0 million | -1% |
| Provision for credit losses | $(4.9) million | $0 | Negative provision in 2014 |
| Net income | $163.0 million | $150.5 million | +8% |
| Diluted earnings per share | $3.69 | $3.38 | +9% |
| Return on average assets / equity | 1.14% / 15.50% | 1.10% / 14.78% | Both improved |
| Efficiency ratio | 58.41% | 60.71% | Improved |
Fourth-quarter net income was $41.2 million, up 5% year over year; diluted EPS was $0.94, up 7%. Quarterly net interest margin was 2.84%, down 1 basis point from fourth-quarter 2013.
- Balance sheet: Total assets were $14.8 billion, up 5%; loans and leases were $6.90 billion, up 13%; deposits were $12.63 billion, up 6%. Loan growth reflected commercial lending and residential mortgages.
- Credit quality: Nonperforming assets fell 24% to $30.1 million; the NPA ratio declined to 0.44% from 0.65%. Net charge-offs were $1.9 million, or 0.03% of average loans, versus $13.4 million, or 0.23%, in 2013. The allowance was $108.7 million, or 1.58% of loans, versus $115.5 million, or 1.89%.
- Liquidity and funding: Cash and cash equivalents were $535.6 million; available-for-sale and held-to-maturity securities had carrying values of $2.29 billion and $4.47 billion. The company reported additional borrowing capacity of $788.9 million from the FHLB and $629.1 million from the Federal Reserve, subject to collateral.
- Debt: Long-term debt was $173.9 million, including $150 million of FHLB advances. Repurchase-agreement funding was $688.6 million. Equity was $1.06 billion.
- Capital: Company Tier 1, total capital, and leverage ratios were 14.69%, 15.94%, and 7.13%, respectively; the Bank was classified as well capitalized. Ratios declined from 2013, partly as risk-weighted assets and lending grew.
- Cash flow: Operating cash flow was $209.5 million, investing cash outflow was $640.1 million, and financing cash inflow was $502.4 million. Cash and cash equivalents increased by $71.8 million to $535.6 million.
Material changes and unusual items
- Higher net interest income reflected loan growth and lower premium amortization on securities; the loan share of earning assets increased.
- Mortgage banking income fell 61% to $7.6 million as refinancing and production declined, and the company retained more conforming mortgages instead of selling them.
- Investment-securities gains were $8.1 million, principally a $7.9 million gain from selling Visa Class B shares. The company also contributed Visa shares to its foundation, favorably affecting its tax rate.
- The negative credit-loss provision reflected recoveries on commercial loans, a reduction in a specific reserve, and management’s assessment of improved credit conditions. Insurance-reserve reductions and lower occupancy and separation costs also helped contain expenses.
- The effective tax rate rose to 31.39% from 29.73%, partly because 2013 included larger tax-reserve releases. 2014 included $2.9 million of energy-related investment tax credits.
- Shareholders received $79.7 million in cash dividends; the company repurchased about 1.1 million shares for approximately $64.0 million. The quarterly dividend remained $0.45 per share.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management described Hawaii’s 2014 economy as healthy, citing record visitor arrivals, low unemployment, rising real-estate prices, and stronger construction. Its stated priorities are balanced growth, customer service, prudent risk management, and capital flexibility.
- Results are particularly exposed to Hawaii and Pacific Island economic conditions, including tourism, real estate, military spending, energy costs, and natural or public-health disruptions.
- Interest-rate movements affect asset yields, funding costs, securities values, and net interest income. The company’s simulation estimated that an immediate 200-basis-point rise would increase annual net interest income by 4.8%, while an immediate 100-basis-point decline would reduce it by 5.3%; these are model estimates, not guidance.
- Potential risks include credit deterioration, concentrated local lending, lengthy Hawaii foreclosure proceedings, competition, regulatory and compliance costs, cybersecurity and vendor disruption, reputational harm, and litigation.
- Higher-risk exposures included residential land loans, certain home-equity loans, and air-transportation leases; these totaled $36.4 million, down 28% from 2013. Residential mortgages remained the largest component of nonperforming assets.
- Unfunded credit commitments and letters of credit totaled $2.45 billion; commitments may expire undrawn. Mortgage-loan representations and warranties create possible repurchase exposure: eight loans totaling $2.1 million were repurchased in 2014 with no losses, and no requests were pending at year-end. Management recorded no liability for this exposure.
- Basel III implementation began in 2015, with requirements phased in through 2019. The company expected to remain well capitalized under the new rules. Its first public stress-test disclosure was scheduled for June 2015.
- The financial statements and internal control over financial reporting received unqualified audit opinions from Ernst & Young LLP.
Investor verification priorities
- Assess whether rapid loan growth can continue without weakening underwriting or requiring higher credit-loss reserves; compare allowance coverage and charge-offs with subsequent results.
- Separate recurring earnings from the Visa-share gain, negative provision, insurance-reserve release, and tax credits; review the sustainability of mortgage and fee income.
- Review interest-rate sensitivity assumptions, securities duration and unrealized losses, and the effect of deposit and repurchase-agreement funding costs.
- Monitor capital ratios under Basel III, liquidity and collateral availability, debt and repurchase maturities, and the Bank’s capacity to upstream dividends.
- Track Hawaii housing and foreclosure trends, residential mortgage delinquencies, higher-risk loan segments, and any new legal, regulatory, or mortgage repurchase claims.