Bank of Hawaii Corporation — Q3 2016 Form 10-Q
Business and period: Bank of Hawaii Corporation is a bank holding company headquartered in Honolulu, serving consumers, businesses, and governments in Hawaii, Guam, and other Pacific Islands. This unaudited quarterly report covers the three and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015. Management says interim results are not necessarily indicative of full-year results.
Financial performance
- Q3: Net interest income was $103.9 million, up 6% year over year; noninterest income was $48.1 million, up 11%; and net income was $43.5 million, up 27%. Diluted EPS was $1.02 versus $0.79. Net interest margin was 2.80%, compared with 2.77%; efficiency ratio was 57.58%, compared with 65.12%.
- First nine months: Net interest income was $310.5 million, up 6%; noninterest income was $150.8 million, up 7%; and net income was $137.9 million, up 17%. Diluted EPS was $3.21 versus $2.71. Net interest margin was 2.84%, compared with 2.79%; efficiency ratio was 56.57%, compared with 60.47%.
- Credit costs and asset quality: Provision for credit losses was $2.5 million in Q3 and $1.5 million year to date, versus none in the comparable 2015 periods. The loan-loss allowance was $104.0 million, or 1.20% of loans, versus $102.9 million, or 1.31%, at year-end. Nonperforming assets fell to $18.7 million from $28.8 million; the NPA ratio declined to 0.21% from 0.37%. Third-quarter annualized net charge-offs were 0.11% of average loans.
- Balance sheet and funding: Total assets were $16.0 billion, up 4% from year-end. Loans and leases rose 10% to $8.7 billion, while deposits increased 4% to $13.8 billion. Shareholders’ equity was $1.16 billion. Other debt was $268.0 million and repurchase-agreement borrowings were $551.7 million; deposits remained the principal funding source.
- Liquidity and capital: Cash and cash equivalents were $638.1 million; available-for-sale securities were $2.2 billion. The company reported an additional $1.6 billion of FHLB borrowing capacity and $651.5 million of Federal Reserve borrowing capacity, subject to available collateral. Regulatory ratios were 13.40% CET1, 14.65% total capital, and 7.25% Tier 1 leverage; the company said it and the Bank were well-capitalized.
- Cash flow and shareholder returns: For the first nine months, operating cash flow was $103.1 million, investing cash outflow was $623.8 million, and financing cash inflow was $403.2 million. Cash and cash equivalents declined $117.6 million to $638.1 million. The company repurchased $51.4 million of shares and paid $60.7 million in dividends; dividends declared were $1.41 per share year to date.
Changes, outlook, and risks
- Earnings growth reflected loan and deposit growth, a modestly higher net interest margin, increased mortgage banking income, and lower expenses than in 2015. Loan growth was broad, including commercial construction and consumer home-equity lending. Management attributed the improvement in Hawaii business conditions to tourism, real estate, and construction strength.
- Comparisons benefited from the absence of a $9.5 million aircraft impairment recorded in Q3 2015. Mortgage banking income increased with higher loan production and sales, partly offset year to date by a $2.1 million mortgage-servicing-rights valuation impairment. A $11.2 million Visa Class B share-sale gain contributed to year-to-date securities gains; Q3 included a $0.3 million loss related to fees on prior Visa share-sale transactions. A first-quarter recovery of a nonperforming commercial loan added $1.3 million of interest income.
- The effective tax rate declined to 29.84% in Q3 and 30.62% year to date, partly due to releases of prior-year federal and state tax reserves and energy tax credits. These items may not recur.
- No specific earnings or financial guidance is provided. Management described liquidity, capital, and credit reserves as strong or adequate. Its interest-rate simulation showed that a gradual 200-basis-point rate increase could raise next-12-month net interest income by 4.1%, while a 100-basis-point decrease could reduce it by 2.6%; results are model estimates, and a flatter or inverted yield curve could weigh on income.
- Key risks include interest-rate and securities-market changes, Hawaii economic and tourism conditions, credit quality, competition, regulatory and capital requirements, litigation, cyber and operational disruption, and natural disasters. Lending is concentrated in Hawaii and Pacific Islands, including substantial Hawaii real-estate exposure. Commitments to extend credit and letters of credit totaled $2.7 billion; amounts drawn may differ. Management said pending legal matters were not expected to exceed reserves materially, but unexpected developments could result in greater losses. Mortgage representation-and-warranty and servicing repurchase requests were none pending at quarter-end; management cautioned requests could increase.
Important facts for investors to verify
- Whether loan growth—particularly in home equity, construction, and real estate—continues without deterioration in delinquencies, charge-offs, or the allowance’s coverage.
- How much earnings growth depends on nonrecurring items, including the Visa share gain, the prior-year aircraft impairment comparison, loan recovery, and tax-reserve releases.
- Whether deposit costs and other funding costs rise faster than asset yields, and how actual results compare with management’s interest-rate sensitivity scenarios.
- The composition and market sensitivity of the $6.0 billion securities portfolio, including its mortgage-backed securities concentration and unrealized-value changes.
- Whether capital, liquidity, and shareholder distributions remain supportable as loans and off-balance-sheet commitments grow.