Business Context and Reporting Period
Company: Bank of Hawaii Corporation (BOH)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Overview: BOH is a Delaware bank holding company headquartered in Honolulu, Hawaii. Its principal subsidiary, Bank of Hawaii, is the largest independent financial institution in Hawaii, serving customers in Hawaii and the Pacific Islands (Guam, American Samoa). The company operates through four segments: Retail Banking, Commercial Banking, Investment Services, and Treasury. In 2009, the company sold most assets of its wholesale insurance agency and retail insurance brokerage subsidiaries.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Income | $144.0 million | $192.2 million |
| Diluted EPS | $3.00 | $3.99 |
| Net Interest Income | $412.3 million | $418.8 million |
| Provision for Credit Losses | $107.9 million | $60.5 million |
| Total Noninterest Income | $267.8 million | $258.1 million |
| Total Noninterest Expense | $350.0 million | $346.8 million |
| Total Assets | $12.41 billion | $10.76 billion |
| Total Deposits | $9.41 billion | $8.29 billion |
| Long-Term Debt | $90.3 million | $203.3 million |
| Shareholders' Equity | $896.0 million | $790.7 million |
| Net Interest Margin | 3.72% | 4.33% |
| Return on Assets (ROA) | 1.22% | 1.84% |
| Return on Equity (ROE) | 16.42% | 24.54% |
| Allowance for Loan and Lease Losses | $143.7 million | $123.5 million |
| Non-Performing Assets | $48.3 million | $14.9 million |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 25% to $144.0 million, primarily driven by a $47.4 million increase in the provision for credit losses and a $15.8 million increase in FDIC insurance expense.
- Credit Quality Deterioration: Non-performing assets (NPAs) surged to $48.3 million from $14.9 million in 2008. Net charge-offs increased to $87.7 million (1.43% of average loans) from $28.0 million. The allowance for loan losses increased to 2.49% of total loans.
- Net Interest Margin Compression: NIM fell 61 basis points to 3.72% due to a decreasing interest rate environment and a strategic shift to lower-yielding, high-grade securities to maintain liquidity.
- Balance Sheet Strengthening: Total deposits grew 13% to $9.4 billion. Shareholders' equity increased 13% to $896.0 million. Long-term debt was reduced by 56% following the repayment of subordinated and privately placed notes.
- FDIC Expense Spike: FDIC insurance expense rose significantly due to higher assessment rates, an industry-wide assessment, and the prepayment of assessments for 2010-2012.
Guidance, Outlook, and Risks
Management Commentary: Management anticipates the challenging economic environment to continue in 2010. The strategy focuses on maintaining high levels of liquidity, reserves for credit losses, and capital. The company has ceased share repurchases to build capital and has liquidated private-label mortgage-backed securities to reduce risk.
Key Risks and Contingencies:
- Economic Sensitivity: Earnings are heavily tied to the Hawaii and Pacific Islands economies, which rely on tourism and real estate. Continued weakness in these sectors poses a risk to asset quality.
- Interest Rate Risk: The company is more sensitive to interest rate changes in 2009 than in prior years. Rising rates could negatively impact the market value of equity and net interest income.
- Regulatory Changes: Increased FDIC assessments and potential regulatory reforms could impact earnings and capital levels.
- FHLB Stock: The company holds $61.3 million in Federal Home Loan Bank stock. While no impairment was recorded, the FHLB is treated as undercapitalized, limiting its ability to pay dividends or redeem stock.
- Legal Contingencies: The company has indemnification obligations related to Visa litigation, though management believes these are sufficiently funded by an escrow account.
Investor Verification Checklist
- Credit Loss Trajectory: Verify if the trend of increasing non-performing assets and charge-offs stabilizes in 2010, particularly in the residential mortgage and construction portfolios.
- FDIC Assessment Impact: Confirm the ongoing impact of the prepayment of FDIC assessments and future assessment rate changes on liquidity and earnings.
- Net Interest Margin Recovery: Monitor the ability to maintain or improve NIM in a low-interest-rate environment as the company deploys excess liquidity.
- Capital Ratios: Track Tier 1 and Total Capital ratios to ensure they remain well above regulatory minimums ("well capitalized" status) despite potential future credit losses.
- Real Estate Exposure: Assess the concentration of higher-risk loans in residential home building and land loans, which saw significant increases in risk exposure.