Business context and reporting period
Bank of Hawaii Corporation is a Honolulu-based bank holding company serving Hawaii, Guam, and other Pacific Islands. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022; comparisons are to the corresponding 2021 periods unless otherwise noted.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 |
|---|---|---|
| Net interest income | $132.9 million | $123.5 million |
| Net interest margin | 2.47% | 2.37% |
| Provision for credit losses | $2.5 million benefit | $16.1 million benefit |
| Noninterest income | $42.2 million | $44.4 million |
| Noninterest expense | $102.9 million | $96.5 million |
| Net income | $56.9 million | $67.5 million |
| Diluted EPS | $1.38 | $1.68 |
| Return on average assets | 1.00% | 1.23% |
| Return on average common equity | 18.19% | 19.61% |
| Efficiency ratio | 58.80% | 57.47% |
For the six months ended June 30, net income was $111.7 million versus $127.5 million; diluted EPS was $2.70 versus $3.18. Net cash provided by operating activities was $158.3 million, investing cash flow was negative $439.0 million, and financing cash flow was positive $559.6 million. Cash and cash equivalents ended the period at $839.4 million, compared with $1.18 billion at June 30, 2021.
At June 30, 2022, total assets were $23.2 billion, loans and leases were $13.0 billion, deposits were $21.0 billion, and shareholders’ equity was $1.35 billion. Loans grew 5.6% and deposits 3.3% from December 31, 2021. Total debt was limited: $425.5 million of repurchase agreements and $10.3 million of other debt. The company reported $839.4 million in cash and cash equivalents, $4.0 billion in available-for-sale securities, and additional secured borrowing capacity of $3.0 billion from the FHLB and $636.3 million from the Federal Reserve.
Material changes versus comparable periods
- Q2 net income fell 16% and diluted EPS fell 18%. Higher net interest income and lower credit-loss expense did not offset lower noninterest income and higher expenses.
- Net interest income rose 7.6%, with NIM up 10 basis points, which management attributed mainly to higher rates and loan growth.
- Noninterest income declined 5.1%, primarily as mortgage banking income fell 59% amid lower sales of conforming loans; securities-related fees also weighed on results.
- Noninterest expense increased 6.6%. Higher occupancy costs, salaries, and benefits contributed; occupancy comparisons were affected by a prior-year real estate sale gain.
- Loans grew by $692.5 million from year-end, led by commercial mortgage, residential mortgage, and home equity lending. Deposits increased by $665.6 million.
- Shareholders’ equity declined $262.9 million from year-end, principally reflecting $302.1 million of after-tax other comprehensive loss, largely unrealized investment-security losses. Investment securities had $957.8 million in gross unrealized losses at June 30 versus $142.8 million at year-end.
- Credit indicators remained low: nonperforming assets were $15.5 million, or 0.12% of loans and foreclosed real estate. The loan-loss allowance was $148.5 million, 1.15% of loans, versus $157.8 million and 1.29% at year-end.
Outlook, risks, contingencies, and unusual items
Management described Hawaii’s economy as recovering, citing improving visitor arrivals and employment, while noting visitor arrivals remained below pre-pandemic levels. The filing provides no specific earnings or revenue guidance. Management’s rate simulation estimated annual net interest income would rise 3.7% under a gradual 200-basis-point increase and 7.8% under an immediate 200-basis-point increase; these are model scenarios, not forecasts. A flatter or inverted yield curve could reduce net interest income.
Key risks include changes in interest rates, credit quality, economic conditions and tourism in Hawaii, COVID-19 effects, market values of securities, liquidity and capital requirements, cyber and operational disruptions, regulation, and litigation. Management said it did not expect pending legal matters to result in losses materially exceeding reserves, while acknowledging unexpected developments could cause greater losses. Credit commitments totaled $3.45 billion, including $3.29 billion of unfunded commitments; these amounts do not necessarily represent future cash needs.
Management attributed securities’ unrealized losses primarily to rising interest rates, not credit impairment, and said it did not intend, nor expect to be required, to sell the affected securities before recovery. The securities portfolio was largely government-agency and government-sponsored-enterprise securities. Regulatory capital ratios at June 30 included common equity tier 1 of 11.66%, tier 1 capital of 13.01%, total capital of 14.14%, and tier 1 leverage of 7.29%; the company said it remained well-capitalized. The board declared a $0.70 common dividend payable in September 2022. The filing reports no material change in risk factors from the 2021 Form 10-K.
Most important facts for investors to verify
- Whether loan growth and higher rates continue to lift NIM, and how quickly deposit costs respond.
- Whether securities’ substantial unrealized losses affect regulatory capital, liquidity, or management’s ability to hold securities to recovery.
- Credit trends in Hawaii-focused real estate and consumer portfolios, including nonaccrual loans, delinquencies, and adequacy of the allowance.
- Deposit composition and stability: estimated uninsured deposits were $11.2 billion, including $818.7 million of estimated uninsured time deposits.
- Whether mortgage banking weakness, expense growth, or further rate and economic changes pressure earnings and capital.
- That reported interim results are unaudited and may not indicate full-year results; disclosure controls were judged effective as of June 30, 2022.