Bank of Hawaii Corporation — Q3 2020 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2020. The Honolulu-based bank serves Hawaii, Guam and other Pacific Islands. Comparisons are primarily with 2019; balance-sheet comparisons are with December 31, 2019.
Financial performance and position
| Metric | Q3 2020 | Prior comparable period / period-end change |
|---|---|---|
| Net interest income | $124.2 million | Down 1% year over year |
| Net interest margin | 2.67% | 3.01% in Q3 2019 |
| Noninterest income | $41.7 million | Down 10% year over year |
| Provision for credit losses | $28.6 million | $4.3 million in Q3 2019 |
| Net income / diluted EPS | $37.8 million / $0.95 | $52.1 million / $1.29 in Q3 2019 |
| Efficiency ratio | 54.22% | 58.55% in Q3 2019 |
| Dividends declared per share | $0.67 | $0.65 in Q3 2019 |
- For the first nine months, net interest income was $376.8 million, up 1%; net interest margin was 2.82%, down 23 basis points. Net income was $111.5 million, down 34%, and diluted EPS was $2.80 versus $4.11.
- At September 30, total assets were $20.1 billion, loans and leases $11.8 billion, deposits $17.7 billion and shareholders’ equity $1.36 billion. Loans increased 7% and deposits 12% from year-end 2019, with commercial lending and deposit growth prominent.
- Allowance for credit losses was $203.5 million, or 1.73% of loans (1.81% excluding PPP loans); total reserves, including unfunded commitments, were $205.8 million. Nonperforming assets were $18.6 million, or 0.16% of loans and foreclosed real estate.
- Cash and cash equivalents were $1.00 billion. Nine-month operating cash flow was $87.7 million, investing cash outflow $1.48 billion and financing cash inflow $1.84 billion; cash increased $442.3 million.
- Repurchase-agreement funding was $602.1 million and other debt $60.5 million. Available additional borrowing capacity was $2.9 billion from the FHLB and $1.4 billion from the Federal Reserve. The company reported it and the Bank were “well-capitalized”; company CET1 was 12.09% and total capital ratio 13.35%.
Changes, outlook, risks and unusual items
- COVID-19 and credit estimates: The pandemic and Hawaii’s tourism-dependent economy drove uncertainty and higher expected lifetime credit losses under CECL. Nine-month provision was $102.6 million versus $11.3 million in 2019. The allowance rose 85% from year-end; management cautioned that economic assumptions and forecasts could make reserves and earnings more volatile.
- Borrower assistance and PPP: At September 30, COVID-related modifications covered $836.7 million of commercial loans and leases and $691.2 million of consumer loans and leases. The Bank had 4,504 PPP loans totaling $544.5 million at quarter-end; PPP loans carry a 1% rate and are SBA-guaranteed, with forgiveness subject to eligibility requirements.
- Revenue and rates: Lower transaction volumes, fewer overdraft fees and suspended ATM surcharges reduced fee income. Lower asset yields compressed margin, partly offset by lower deposit funding costs. Nine-month noninterest income benefited from an $11.1 million net securities gain, mainly the sale of the company’s remaining Visa Class B shares; the shares were fully sold in Q2.
- Other expense and legal matters: Q3 expense included a $1.9 million gain on sale of Oahu property; lower year-over-year other expense also reflected a $6.0 million overdraft-litigation reserve recorded in Q3 2019. A separate $8.0 million overdraft class-action settlement liability was recorded in 2020; final court approval was pending the CAFA notice period through December 15, 2020. A PPP agent-fee lawsuit was voluntarily dismissed without prejudice in October 2020. Management noted other litigation could ultimately exceed reserves.
- Capital returns: Share repurchases were suspended in March 2020 because of pandemic uncertainty. The company paid $80.5 million in dividends during the first nine months and declared a further $0.67-per-share dividend in October.
- Outlook and risks: No specific earnings or financial guidance is provided. Management described near-term Hawaii economic conditions as challenging and recovery timing uncertain, particularly given travel restrictions and tourism weakness. Risks also include credit deterioration, interest-rate changes, liquidity and capital requirements, litigation, operational and cybersecurity issues, and natural disasters. The filing says disclosure controls were effective and reports no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How tourism, employment and borrower performance in Hawaii affect credit losses, repeat loan modifications and the adequacy of the $203.5 million allowance.
- PPP loan forgiveness, repayment timing and the effect of low-yield PPP balances and fee recognition on future loan growth and margins.
- Whether weaker transaction activity and overdraft-related fees persist, and how much reported earnings depend on securities gains or other unusual items.
- The final approval and payment of the $8.0 million overdraft settlement, and developments in other legal contingencies.
- Future liquidity, capital ratios and dividend capacity if pandemic-related stress deepens; share repurchases remain suspended.