Bank of Hawaii Corporation — Q3 2010 Form 10-Q
Business context and period. Bank of Hawaii Corporation is a bank holding company headquartered in Honolulu, serving Hawaii, Guam, and other Pacific Islands. This unaudited quarterly report covers the three and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods unless noted.
Key financial results
| Metric | Q3 2010 | Q3 2009 | First nine months 2010 | First nine months 2009 |
|---|---|---|---|---|
| Net interest income | $98.6 million | $108.9 million | $310.2 million | $308.8 million |
| Provision for credit losses | $13.4 million | $27.5 million | $50.0 million | $81.1 million |
| Noninterest income | $63.1 million | $56.8 million | $203.8 million | $187.0 million |
| Noninterest expense | $89.9 million | $84.0 million | $257.5 million | $261.5 million |
| Net income | $44.1 million | $36.5 million | $143.4 million | $103.5 million |
| Diluted earnings per share | $0.91 | $0.76 | $2.96 | $2.16 |
| Net interest margin | 3.27% | 3.85% | 3.50% | 3.78% |
Balance sheet and liquidity at September 30, 2010: Total assets were $12.72 billion; deposits were $9.60 billion; loans and leases were $5.31 billion; available-for-sale and held-to-maturity securities totaled approximately $6.36 billion. Shareholders’ equity was $1.04 billion. Long-term debt was $40.3 million, down from $90.3 million at year-end 2009, following repayment of a $50 million FHLB advance. Cash and cash equivalents at period-end were $444.5 million, compared with $698.5 million a year earlier. Nine-month operating cash flow was $150.4 million, versus $276.0 million in 2009.
Credit and capital: The allowance for loan and lease losses was $147.4 million, or 2.77% of loans and leases, compared with 2.49% at December 31, 2009. Nonperforming assets were $45.2 million (0.85% of loans, loans held for sale, and foreclosed real estate), versus $48.3 million (0.84%) at year-end 2009. Net charge-offs were $46.3 million for the first nine months, down from $61.9 million. The Company reported a Tier 1 capital ratio of 17.71%, total capital ratio of 18.98%, and leverage ratio of 7.15%; it and the Bank were classified as well capitalized.
Material changes and management commentary
- Q3 net income rose 21%; nine-month net income increased 38%. Lower credit-loss provisions and higher securities gains were major contributors. Nine-month securities gains were $42.8 million, versus an immaterial amount in 2009.
- Net interest income fell 9% in Q3 on a taxable-equivalent basis, primarily as lower asset yields and a smaller loan portfolio more than offset lower deposit funding costs. Nine-month taxable-equivalent net interest income increased less than 1%. Management cited soft loan demand and continued loan paydowns; average loans and leases fell 11% in Q3 and 12% year over year for the nine-month period.
- Management said Hawaii’s economy showed signs of recovery, including stronger visitor activity and stable home prices, but remained concerned about the economy, interest rates, and loan demand. Construction employment remained weak.
- Management described credit risk as moderating but highlighted residential homebuilding, residential land, home equity, and air-transportation leasing exposures. It said NPAs could rise in the near term because real-estate loan resolutions in Hawaii may take time.
- Notable Q3 items included $5.2 million of early-termination costs after prepaying $75 million of repurchase agreements; $7.9 million of securities gains; a $2.9 million gain on the sale of proprietary mutual funds; and a $2.6 million net gain related to a railcar leveraged-lease investment, comprising a $1.4 million pretax loss and $4.0 million tax benefit. These items make reported earnings less representative of recurring operations.
- The company resumed share repurchases in Q3, buying 208,500 shares through its program for approximately $9.8 million. It said it planned to continue repurchases in Q4, subject to market conditions and other factors. The board declared a $0.45-per-share quarterly dividend payable in December 2010. No formal earnings guidance was provided.
Risks, contingencies, and outlook
- Interest-rate risk is significant. Management characterized the balance sheet as asset-sensitive: its model estimated quarterly net interest income would rise 1.7% for a gradual 200-basis-point increase and fall 2.5% for a 100-basis-point decline. A flatter or inverted yield curve could reduce net interest income; management identified scenarios of substantially lower rates as its greatest exposure.
- Credit commitments totaled $2.07 billion, including $1.95 billion of unfunded commitments to extend credit; these are contingent and do not necessarily represent expected funding needs.
- Regulatory and legislative uncertainty includes Dodd-Frank provisions affecting overdraft and debit-card fees, consumer financial regulation, and proposed Basel III capital and liquidity standards. Management said the eventual U.S. rules and their effects were not yet clear.
- Other stated risks include Hawaii tourism and economic conditions, market and funding access, credit quality and reserves, litigation and regulatory investigations, competition, natural disasters, and changes in tax or accounting rules. The company reported effective disclosure controls and no material Q3 change in internal control over financial reporting.
Most important facts for investors to verify
- How much of the earnings improvement is sustainable after securities and other asset-sale gains, tax benefits, and the Q3 repurchase-agreement termination charge.
- Whether loan demand and net interest margin stabilize, given falling loan balances and lower earning-asset yields.
- Whether credit quality continues to improve: monitor residential mortgage nonaccruals, foreclosed property, troubled debt restructurings, and the allowance relative to shrinking loans.
- How final Dodd-Frank and Basel III rules affect fee income, capital, liquidity, and the company’s planned share repurchases and dividends.