Bank of Hawaii Corporation — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; fourth-quarter results are also summarized. Bank of Hawaii serves customers primarily in Hawaii, Guam, and other Pacific Islands.
Financial performance and condition
- Profit: Net income was $183.9 million, up 28% from $144.0 million in 2009. Diluted EPS rose to $3.80 from $3.00. Return on average assets was 1.45% and return on average equity was 18.16%.
- Interest income and margin: Net interest income was $406.5 million, down 1% from $412.3 million. Net interest margin fell 31 basis points to 3.41%, reflecting lower asset yields and a shift toward securities, partly offset by lower funding costs.
- Noninterest income and expense: Noninterest income was $255.3 million, down 5%; it included $42.8 million of net securities gains. Noninterest expense declined 1% to $346.2 million. The efficiency ratio increased to 52.32% from 51.46%.
- Credit costs and quality: Provision for credit losses fell to $55.3 million from $107.9 million. Net charge-offs were $51.6 million, or 0.94% of average loans, versus $87.7 million, or 1.43%, in 2009. Nonperforming assets declined to $37.8 million from $48.3 million; the NPA ratio was 0.71%. The allowance rose to $147.4 million, or 2.76% of loans, from $143.7 million, or 2.49%.
- Balance sheet and liquidity: Total assets were $13.13 billion, up from $12.41 billion. Deposits grew 5% to $9.89 billion, while loans and leases fell 7% to $5.34 billion. Cash and cash equivalents were $607.5 million at year-end. Operating cash flow was $200.3 million; investing cash flow was negative $766.9 million and financing cash flow was positive $619.2 million.
- Debt and capital: Repurchase-agreement funding was $1.90 billion, up 17%; long-term debt was $32.7 million, down from $90.3 million. Shareholders’ equity increased 13% to $1.01 billion. The Company’s Tier 1 capital ratio was 18.28%, total capital ratio 19.55%, and leverage ratio 7.15%; the Bank was classified as well capitalized.
- Shareholder returns: The annual dividend declared remained $1.80 per share. The Company resumed buybacks in July and repurchased 466,500 shares for $21.5 million during 2010.
Material changes versus the prior comparable period
- Net income improved mainly because the credit-loss provision declined by $52.6 million and securities gains increased by $17.1 million. These gains were generated primarily through sales made to manage interest-rate risk and preserve capital.
- Average loans and leases declined $672.4 million, while average available-for-sale securities increased about $1.9 billion as excess liquidity was invested, primarily in government-agency mortgage-backed securities.
- Credit metrics improved overall, but residential mortgage nonaccrual loans increased to $28.2 million from $19.9 million, and restructured loans rose to $32.7 million from $9.2 million.
- At year-end, investment securities totaled $6.67 billion versus $5.52 billion in 2009. The portfolio was predominantly government and agency securities; the Company reported no private-label mortgage-backed securities at year-end.
Fourth-quarter results
Fourth-quarter net income was $40.6 million, versus $40.5 million a year earlier; diluted EPS was $0.84 in both periods. Taxable-equivalent net interest income was $96.6 million, down 7%, and margin was 3.15%, down 42 basis points. The credit provision declined to $5.3 million from $26.8 million. Noninterest income fell 36% to $51.5 million, mainly because the fourth quarter of 2009 included $25.7 million of securities gains. Fourth-quarter 2010 results also included a $1.3 million gain on foreclosed real estate and a $1.0 million settlement gain related to retiree life insurance obligations.
Outlook, risks, and contingencies
- Management expected continued economic recovery and slowly improving loan-growth prospects in 2011, but remained cautious about the economy, interest rates, loan demand, and regulatory uncertainty. No quantified earnings or revenue guidance was provided.
- Hawaii visitor arrivals and spending improved in 2010. Management identified local tourism, employment, real estate, and government-budget conditions as important influences on borrowers and the Company’s results.
- Regulatory changes—including Dodd-Frank, debit interchange-fee limits, overdraft rules, and Basel III capital and liquidity requirements—could affect costs, fee income, capital needs, and operations. The Company estimated proposed debit interchange rules could reduce annual fees by about $18.8 million, assuming unchanged activity.
- Interest-rate exposure is material: management reported an asset-sensitive position, with modeled next-12-month net interest income down 2.0% under a 100-basis-point rate decline and up 0.7% under a 200-basis-point increase. These are model estimates, not forecasts.
- A purported customer class action filed February 15, 2011 alleges improper debit-card overdraft fees and seeks damages and other relief. Management could not estimate a possible loss or range. The filing also describes other ordinary-course legal matters and mortgage-loan repurchase exposure; management considered the latter not material at year-end and had not recorded a related liability.
- The Company held $61.3 million of FHLB stock. The FHLB remained classified as undercapitalized and unable to redeem or repurchase member stock or pay dividends; management could not estimate when the Company’s requested redemption would occur and recorded no impairment.
- The 2010 income-tax benefit included a $7.7 million release of reserves following settlement of LILO/SILO tax matters. Interest due to tax authorities was expected to be settled in 2011 from remaining tax deposits of $22.3 million. Unrecognized tax benefits were $23.0 million.
Important facts for investors to verify
- Whether the recovery in credit quality continues, particularly for residential mortgages, home equity, and restructured loans, and whether the allowance remains adequate.
- How loan balances, deposit growth, securities reinvestment, and net interest margin evolve as interest rates and customer demand change.
- The eventual impact and timing of debit interchange regulation, other Dodd-Frank rules, and Basel III requirements.
- Developments and potential financial exposure from the overdraft-fee lawsuit and any investor mortgage repurchase claims.
- FHLB stock recoverability and redemption timing, and the final cash cost of settling LILO/SILO-related interest.
- The filing reports an unqualified audit opinion on the financial statements and effective internal control over financial reporting; investors may confirm these conclusions in the auditor’s reports.