Bank of Hawaii Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results. Bank of Hawaii serves customers in Hawaii, Guam, and other Pacific Islands.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $93.6 million | $96.8 million | $287.0 million | $294.0 million |
| Noninterest income | $52.4 million | $50.9 million | $147.3 million | $154.2 million |
| Net income | $41.2 million | $43.3 million | $125.8 million | $120.8 million |
| Diluted EPS | $0.92 | $0.92 | $2.77 | $2.54 |
| Net interest margin | 2.98% | 3.09% | 3.01% | 3.16% |
| Noninterest expense | $84.9 million | $84.0 million | $250.8 million | $263.8 million |
| Provision for credit losses | — | $2.2 million | $1.0 million | $10.5 million |
Q3 aggregate revenue, defined as net interest income plus noninterest income, was $146.0 million versus $147.6 million. Nine-month aggregate revenue was $434.3 million versus $448.2 million. Net income fell 5% in Q3 but rose 4% year to date. Return on average assets was 1.22% in Q3 and 1.23% for the nine months; the efficiency ratio was 58.13% and 57.76%, respectively.
Balance sheet, liquidity, and capital
- At September 30, total assets were $13.38 billion, loans and leases $5.78 billion, deposits $11.22 billion, and shareholders’ equity $1.02 billion. Loans rose 4% and deposits rose 6% from December 31, 2011; total assets declined 3%.
- Cash and cash equivalents were $409.9 million at period-end. Nine-month cash flows were $125.4 million from operations, $211.1 million from investing, and $(596.5) million from financing; cash and cash equivalents declined $260.0 million. Financing outflow chiefly reflected a $1.11 billion reduction in short-term borrowings, partly offset by deposit growth.
- Available-for-sale and held-to-maturity securities totaled $6.60 billion in carrying value, down 7% from year-end. Management reduced mortgage-backed securities to manage extension risk and increased state and municipal holdings.
- Repurchase-agreement liabilities were $818.1 million, down 58% from year-end, largely as local government deposits shifted from repos to time deposits. Long-term debt was $28.1 million, down 9%; funds purchased were $10.9 million.
- Tier 1 capital, total capital, and Tier 1 leverage ratios were 16.12%, 17.39%, and 6.78%. The company reported that it and the Bank were “well capitalized.” The quarterly dividend declared was $0.45 per share, unchanged from the prior year.
Changes and credit quality
- Lower asset yields in the low-rate environment reduced Q3 net interest margin by 11 basis points year over year and the nine-month margin by 15 basis points. Lower deposit funding costs partly offset declining loan and securities yields.
- Mortgage banking income rose to $11.7 million in Q3 and $24.4 million year to date, mainly on stronger refinancing activity and loan-sale margins. Fees, exchange, and other service charges fell, primarily due to Durbin Amendment debit interchange limits; management cited debit card income declines of 51% in Q3 and 49% year to date.
- Provision expense was zero in Q3 and $1.0 million year to date, reflecting improved credit trends. Net charge-offs were $1.5 million in Q3 and $8.6 million for nine months, versus $3.7 million and $14.4 million in the comparable 2011 periods.
- The loan-loss allowance was $131.0 million, or 2.27% of loans, down from $138.6 million and 2.50% at year-end. Nonperforming assets were $40.3 million, slightly below year-end; nonaccrual loans were 0.64% of loans versus 0.68%.
- Other year-to-date comparisons include a $3.5 million pretax gain from early buyouts of two cargo-ship leveraged leases and a $1.0 million pretax loss on an aircraft lease sale and termination. 2011 expenses included a $9.0 million overdraft-litigation settlement accrual, while 2011 investment-security gains were $6.1 million versus a $0.1 million net loss in 2012.
Outlook, risks, and contingencies
- No numerical earnings guidance was provided. Management remained cautious about the recovery and loan demand, and expected continued net interest margin pressure as higher-yielding assets run off and reprice. It noted that improved Hawaiian economic conditions could support loan growth.
- Management said the allowance could decline further if credit quality and economic conditions remain stable or improve. It also emphasized expense control and maintaining adequate liquidity, reserves, and capital.
- Key exposures include Hawaii tourism and economic conditions, interest rates, consumer and commercial credit quality, neighbor-island real estate, residential land and home-equity loans, and air-transportation leases. The company also cited regulatory costs, fee pressure, operational and cybersecurity risks, litigation, and potential effects of natural disasters.
- Basel III capital and liquidity rules were still under development. The company expected to conduct its first company-run stress test after September 30, 2013, with regulatory submission due by March 31, 2014.
- Credit commitments totaled $2.10 billion, including $2.02 billion of unfunded loan commitments. Two mortgage representation-and-warranty repurchase requests totaling $0.4 million were pending; five loans totaling $1.9 million had been repurchased in the first nine months without losses. No liability was recorded for possible mortgage repurchases, which management considered not material based on historical experience.
Important facts for investors to verify
- Whether margin pressure and debit interchange restrictions continue to offset loan growth and stronger mortgage banking.
- Whether improving credit trends support further reserve reductions, particularly given higher-risk home-equity, land-loan, and air-transportation exposures.
- Deposit stability and funding mix after the substantial shift from government repos to time deposits, including the maturity and termination features of private-institution repos.
- Effects of forthcoming regulatory capital, liquidity, and stress-testing requirements on capital flexibility and shareholder distributions.
- Subsequent performance of the pending mortgage repurchase claims, TDR portfolio, and other disclosed contingencies. The filing reports no material change to the risk factors in the 2011 Form 10-K.