Bank of Hawaii Corporation — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited results for the three and six months ended June 30, 2015. The company provides banking and financial services in Hawaii, Guam, and other Pacific Islands; most lending is concentrated in Hawaii.
Financial performance
- Second quarter: Net interest income was $97.8 million, up 4% year over year; noninterest income was $45.9 million, up 3%. Combined operating revenue was $143.7 million. Net income was $41.2 million, down 1%; diluted EPS was $0.95, versus $0.94. The net interest margin was 2.81%, down 5 basis points.
- First half: Net interest income was $194.6 million, up 4%; noninterest income was $98.2 million, up 10%. Combined operating revenue was $292.8 million. Net income was $83.6 million, up 4%; diluted EPS was $1.92, up 6%. The net interest margin was 2.81%, down 6 basis points.
- Expenses and credit provision: Noninterest expense rose 3% in Q2 to $83.6 million and 4% in H1 to $170.5 million, with salaries and benefits the largest contributor to the increase. No credit-loss provision was recorded in either 2015 period; the comparable 2014 periods included a $2.2 million negative provision.
- Balance sheet at June 30: Assets were $15.25 billion, up 3% from year-end 2014. Loans and leases were $7.43 billion, up 8%; deposits were $13.09 billion, up 4%. Shareholders’ equity was $1.08 billion. The allowance for loan and lease losses was $106.0 million, or 1.43% of loans, versus 1.58% at year-end.
- Liquidity, debt, and cash flow: Cash and cash equivalents were $756.9 million. Repurchase-agreement borrowings were $672.3 million; other debt was $170.8 million, including $150 million of FHLB advances. The company reported $703.4 million of additional FHLB borrowing capacity and $605.3 million of FRB capacity. For H1, operating cash flow was $116.1 million, investing cash flow was negative $278.2 million, and financing cash flow was $383.4 million.
- Capital and shareholder returns: The company reported Basel III Common Equity Tier 1 and Tier 1 ratios of 14.47%, a total capital ratio of 15.72%, and a Tier 1 leverage ratio of 7.21%; it stated that the company and bank remained well capitalized. H1 dividends were $0.90 per share and share repurchases totaled $24.4 million.
Material changes and unusual items
- Loan growth increased interest income, but lower loan and securities yields in the low-rate environment reduced the net interest margin. Management shifted some investment-securities proceeds, including proceeds from reducing Ginnie Mae mortgage-backed securities, toward loans.
- H1 investment-securities gains included a $10.1 million gain from selling Visa Class B shares in Q1. The company said it did not anticipate further Visa share sales in the remainder of 2015. Q2 gains were only $0.1 million, versus $2.1 million in Q2 2014.
- Mortgage banking income rose as the company sold more conforming residential loans. Salaries and benefits increased partly because of separation expense, higher commissions, and higher incentive and share-based compensation.
- Net income was nearly flat in Q2 despite higher operating revenue, reflecting higher expenses and the absence of the prior-year negative credit provision and Visa-related securities gain.
Outlook, risks, and contingencies
- No specific earnings or financial guidance is provided. Management described Hawaii’s economy as positive, citing stable tourism, low unemployment, active construction, and a strong real-estate market; it also noted that interim results are not necessarily indicative of full-year results.
- Management identified interest-rate risk as the primary market risk. Its simulation estimated that a gradual +200-basis-point rate change would increase annual net interest income by 1.9%, while a gradual -100-basis-point change would reduce it by 1.3%; a flattening or inverted yield curve could also pressure income.
- Credit indicators were generally favorable: nonperforming assets were $29.5 million, or 0.40% of loans and foreclosed real estate, versus 0.44% at year-end. However, net charge-offs were $2.7 million for H1, compared with net recoveries of $0.6 million in H1 2014; troubled debt restructurings increased to $63.2 million from $60.2 million.
- Risks include reliance on Hawaii’s economy and tourism, competition, interest-rate and credit conditions, regulation, cybersecurity and operational disruptions, and potential legal or mortgage repurchase claims. Management reported no pending mortgage repurchase requests and no material change to previously disclosed risk factors. It cautioned that legal outcomes could exceed recorded reserves in unexpected circumstances.
Important facts for investors to verify
- Whether loan growth can sustain net interest income while asset yields and net interest margin remain under pressure.
- The durability of earnings excluding the $10.1 million Visa share-sale gain and other nonrecurring income items.
- Credit quality trends, especially consumer net charge-offs, troubled debt restructurings, and the adequacy of the allowance as loans expand.
- Liquidity and capital capacity under adverse rate, economic, or regulatory scenarios, including the terms and availability of secured borrowing capacity.
- Potential sensitivity of Visa Class B-related arrangements, mortgage servicing rights, and mortgage representation-and-warranty exposure to future events.