Business context and reporting period
Bank of Hawaii Corporation’s unaudited Form 10-Q covers the quarter ended March 31, 2021, with income-statement and cash-flow comparisons to the quarter ended March 31, 2020. The bank provides consumer and commercial banking and related financial services in Hawaii, Guam, and other Pacific Islands. Results are interim and are not necessarily indicative of full-year performance.
Key financial metrics
Amounts are in U.S. dollars; financial-statement amounts are in millions unless noted.
| Metric | Q1 2021 / March 31, 2021 | Comparable / prior date |
|---|---|---|
| Net interest income | $120.6 | $126.0 in Q1 2020 |
| Net interest margin | 2.43% | 2.96% in Q1 2020 |
| Noninterest income | $43.0 | $46.1 in Q1 2020 |
| Net income | $59.9; diluted EPS $1.50 | $34.7; diluted EPS $0.87 in Q1 2020 |
| Dividends declared per share | $0.67 | $0.67 in Q1 2020 |
| Operating cash flow | $182.4 | $(4.9) in Q1 2020 |
| Total assets | $21,947.3 | $20,603.7 at December 31, 2020 |
| Loans and leases | $12,140.7 | $11,940.0 at December 31, 2020 |
| Deposits | $19,556.7 | $18,211.6 at December 31, 2020 |
| Shareholders’ equity | $1,360.2 | $1,374.5 at December 31, 2020 |
| Allowance for credit losses on loans | $198.3; 1.63% of loans | $216.3; 1.81% at December 31, 2020 |
| Nonperforming assets | $17.9; 0.15% of loans, leases, and foreclosed real estate | $18.5; 0.15% at December 31, 2020 |
Return on average assets was 1.15% versus 0.77% in Q1 2020; return on average equity was 17.65% versus 10.64%. The efficiency ratio increased to 60.45% from 55.96%. Cash and cash equivalents were $1.393 billion, including $1.102 billion in funds sold. Investment securities totaled about $7.5 billion. Debt included $600.5 million of repurchase agreements and $60.5 million of other debt; the bank also reported $2.8 billion of unused FHLB borrowing capacity and $1.1 billion of additional FRB capacity.
Material changes versus comparable periods
- Net income rose 73% year over year, primarily reflecting a $14.3 million negative provision for credit losses in Q1 2021 versus a $33.6 million provision in Q1 2020. This provision benefit more than offset lower net interest income and noninterest income.
- Net interest income declined 4% year over year and net interest margin fell 53 basis points, mainly due to lower asset yields; reduced deposit funding costs and higher average earning assets partly offset the decline.
- Noninterest income decreased 7%. Mortgage banking income rose $3.2 million, including a $2.2 million recovery in mortgage-servicing-rights valuation allowances versus a $2.5 million impairment in Q1 2020. Other income fell $5.7 million, largely due to lower customer interest-rate-swap fees.
- Noninterest expense increased 3%, including higher incentive compensation and data-processing costs; lower separation expense and other costs partly offset these increases.
- From December 31, 2020, loans and leases grew 2%, deposits grew 7%, and the allowance-to-loans ratio declined from 1.81% to 1.63%. Shareholders’ equity declined about 1%, with other comprehensive loss of $49.6 million largely reflecting unrealized investment-security losses.
- Net cash provided by financing was $1.317 billion, driven mainly by a $1.345 billion increase in deposits. Investing activities used $721.0 million, principally reflecting net purchases of investment securities and loan growth.
Outlook, commentary, risks, contingencies, and unusual items
- Outlook: The filing provides no specific earnings or financial guidance. Management said Hawaii’s economy would likely continue to face significant challenges despite stimulus programs and an increase in tourism. It cited the uncertain duration and recovery effects of COVID-19 and tourism weakness.
- Credit and pandemic exposure: At March 31, COVID-related loan and lease modifications totaled $271.0 million across 118 commercial accounts and $51.1 million across 419 consumer accounts. These accommodations generally were not treated as troubled debt restructurings under applicable relief provisions. PPP loans totaled $744.8 million across 6,911 loans. Management reported $84.1 million of TDR loans, up from $72.5 million at year-end.
- Interest-rate and securities risk: Management’s simulation estimated annual net interest income would rise 5.2% under a gradual +200-basis-point scenario and fall 1.2% under a gradual −100-basis-point scenario. These are model estimates, not forecasts. Gross unrealized securities losses increased to $95.1 million from $2.9 million at year-end, primarily attributed to rising interest rates; management said AFS unrealized losses were not credit-related and did not expect or anticipate being required to sell affected securities before recovery.
- Capital and shareholder returns: The company and bank were classified as well-capitalized. The company’s CET1 ratio was 12.35%, total capital ratio 13.61%, and Tier 1 leverage ratio 6.61%. The regular quarterly dividend remained $0.67 per share; the board declared the next $0.67 dividend in April. The company said its share-repurchase program remained suspended; Q1 share acquisitions were for employee tax withholding and deferred-compensation obligations, not program repurchases.
- Legal and contractual matters: An $8.0 million overdraft-fee class settlement became effective in January 2021, with refunds underway. The company reported $2.951 billion in total credit commitments. It had $2.4 billion of residential mortgages sold subject to representation-and-warranty provisions; $0.6 million was repurchased in the quarter, with no pending repurchase requests at quarter-end. Management said other pending legal claims were not expected to materially exceed recorded reserves, while noting unexpected developments could result in greater losses.
- Other risks: Key disclosed risks include Hawaii and Pacific Islands economic and tourism conditions, COVID-19, credit quality, interest-rate changes, operational and cybersecurity failures, regulatory or tax changes, litigation, and the transition away from LIBOR by June 30, 2023. Management said a cross-functional LIBOR transition effort was in progress.
Important facts for investors to verify
- Whether the unusually favorable negative credit-loss provision is sustainable, and how changes in economic forecasts and government support affect reserves.
- How borrowers exiting COVID-related deferrals perform, including the status and risk profile of the remaining modified loans, PPP balances, and TDRs.
- Whether deposit growth persists and how loan growth, deposit mix, and asset yields affect net interest margin and earnings.
- The sensitivity of securities values, accumulated other comprehensive income, and capital to further interest-rate changes and mortgage prepayments.
- Progress in Hawaii tourism and the local economy, as well as developments in mortgage repurchase exposure, the overdraft settlement, and LIBOR transition.