Bank of Hawaii Corporation — 2020 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2020, including fourth-quarter results. Bank of Hawaii is a regional bank holding company serving Hawaii, Guam and other Pacific Islands, with Consumer Banking, Commercial Banking, and Treasury and Other segments. The company’s markets, particularly Hawaii, were severely affected by COVID-19-related restrictions and the sharp decline in tourism.
Financial performance and position
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Net interest income | $496.3 million | $497.7 million | Down 0.3%; net interest margin fell to 2.73% from 3.03%. |
| Provision for credit losses | $117.8 million | $16.0 million | Increased substantially, primarily reflecting CECL estimates and COVID-19 economic forecasts. |
| Noninterest income | $184.4 million | $183.3 million | Up 0.6%; securities gains and mortgage banking growth offset weaker transaction-related fees. |
| Noninterest expense | $373.8 million | $379.2 million | Down 1.4%; lower compensation and other expense partly offset higher occupancy and equipment costs. |
| Net income | $153.8 million | $225.9 million | Down 32%; diluted EPS was $3.86 versus $5.56. |
| Return on average assets / equity | 0.79% / 11.38% | 1.29% / 17.65% | Both declined. |
| Loans and leases | $11.94 billion | $10.99 billion | Up 9%, primarily commercial growth, including PPP lending. |
| Deposits | $18.21 billion | $15.78 billion | Up 15%, led by consumer and commercial deposits. |
| Allowance for credit losses | $216.3 million; 1.81% of loans | $110.0 million; 1.00% | Allowance nearly doubled; net charge-offs nevertheless declined to $7.1 million from $12.7 million. |
| Cash and cash equivalents | $614.1 million | $558.7 million | Year-end balance increased. |
| Shareholders’ equity | $1.37 billion | $1.29 billion | Up 7%. |
Cash flow and funding. Operating cash flow was $146.4 million, down from $234.2 million. Investing activities used $2.37 billion, largely reflecting securities purchases and loan growth; financing activities provided $2.28 billion, mainly from a $2.43 billion increase in deposits. Total assets grew 14% to $20.60 billion. Year-end available-for-sale securities were $3.79 billion. The filing does not present a conventional industrial-company free-cash-flow measure.
Debt and liquidity. Year-end other debt was $60.5 million, including $50 million of FHLB advances and finance-lease obligations; repurchase-agreement borrowings were $600.6 million. The Bank reported $2.8 billion of additional FHLB borrowing capacity and $427.9 million of available FRB capacity, subject to collateral. The Bank and holding company were classified as well capitalized. The Bank’s CET1, Tier 1, total capital, and Tier 1 leverage ratios were 11.43%, 11.43%, 12.69%, and 6.35%, respectively.
Margins and fourth quarter. The full-year efficiency ratio was 54.91%, compared with 55.68% in 2019. Fourth-quarter net income was $42.3 million and diluted EPS was $1.06, each down 27% year over year. Fourth-quarter net interest margin was 2.48%, versus 2.95% a year earlier; provision for credit losses was $15.2 million.
Material changes and unusual items
- Net interest margin contracted amid lower market rates and lower asset yields, partly offset by reduced deposit costs. Average earning assets grew 10% and average loans and leases grew about $904 million.
- The company adopted CECL on January 1, 2020. Adoption increased retained earnings by $3.6 million after tax; subsequent COVID-19 forecasts and expected lifetime losses drove a much larger allowance and provision during the year.
- Fee income was pressured by lower card and merchant transaction volumes, suspended ATM surcharges, and lower overdraft and account-analysis fees. Mortgage banking income rose 31% to $17.9 million on higher conforming loan sales, partly offset by a $3.9 million mortgage-servicing-rights impairment.
- Net securities gains were $9.9 million, compared with a $4.0 million loss in 2019. The 2020 result included the sale of the company’s remaining Visa Class B shares.
- The company recorded $5.6 million of branch-exit costs after deciding to close 12 branches, with closures expected to be completed by May 31, 2021, subject to regulatory requirements. A separate disclosure reports a $7.0 million fourth-quarter impairment charge that included branch, ATM, and leveraged-lease items; the filing identifies a $3.0 million leveraged-lease residual-value impairment.
- In 2020, the company paid $107.4 million in dividends and repurchased $14.0 million of shares under its repurchase program before suspending repurchases on March 17 because of pandemic uncertainty. The board declared a $0.67-per-share quarterly dividend in January 2021.
Outlook, risks and contingencies
Management provided no specific earnings or financial guidance. It said the duration and economic effects of COVID-19, tourism recovery, customer credit performance, and government support remained uncertain. The company continued customer payment-relief programs; at year-end, qualifying COVID-related modifications totaled $311.6 million for commercial loans and leases and $178.1 million for consumer loans and leases. The Bank reported 4,435 PPP loans totaling $528.1 million at December 31, 2020; a later filing-date disclosure reports 4,237 loans totaling $504.9 million as of February 24, 2021.
- Key risks include prolonged weakness in Hawaii tourism and related industries, further deterioration in borrower performance or collateral values, interest-rate and net-interest-margin volatility, and estimation uncertainty in the CECL allowance.
- Other disclosed risks include cybersecurity and operational disruption, regulatory and consumer-protection changes, LIBOR transition exposure, natural disasters, and dependence of parent-company dividends and repurchases on regulated Bank dividends.
- The company had an $8.0 million reserve for an overdraft-practices class-action settlement. Final court approval was issued in December 2020; the settlement became effective January 21, 2021, and customer refunds began shortly thereafter. Management said other known legal matters were not expected to materially affect results, while noting outcomes could differ.
- For mortgage representation-and-warranty matters, the company repurchased 40 loans with $13.4 million of unpaid principal during 2020, without material losses; no repurchase requests were pending at year-end. The filing also describes Visa-related indemnification exposure, which management believes is sufficiently funded by Visa’s escrow or future conversion-ratio adjustments.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified the allowance for credit losses as a critical audit matter because of the judgment involved in qualitative adjustments and forecasts.
Important facts for investors to verify
- How allowance assumptions, economic forecasts, modification performance, and credit exposures in tourism-sensitive industries evolve; the year-end allowance rose sharply despite lower net charge-offs.
- Whether deposit growth and liquidity capacity remain durable, and whether loan growth—especially PPP and commercial real estate exposure—supports future earnings without weakening credit quality.
- The trajectory of net interest margin and fee income as rates, customer activity, and tourism change.
- Completion and final costs of the 12 branch closures, and the status of the overdraft settlement and any other material legal contingencies.
- The sustainability of the $0.67 quarterly dividend, given regulatory limits on Bank dividends and the continued suspension of share repurchases.