Business Context and Reporting Period
Company: Bank of Hawaii Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Overview: Bank of Hawaii Corporation is a bank holding company headquartered in Honolulu, Hawaii, with operations in Hawaii, American Samoa, and the Pacific Islands. The reporting period reflects continued economic weakness in Hawaii, characterized by lower visitor spending and a contracting job market, though visitor arrivals appear to be stabilizing. The Company focused on strengthening its balance sheet through increased liquidity, capital, and reserves for credit losses.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | As of Sep 30, 2009 |
|---|---|---|---|
| Net Income | $36.5 million | $103.5 million | - |
| Diluted EPS | $0.76 | $2.16 | - |
| Net Interest Income | $108.9 million | $308.8 million | - |
| Provision for Credit Losses | $27.5 million | $81.1 million | - |
| Total Assets | - | - | $12.2 billion |
| Total Deposits | - | - | $9.3 billion |
| Long-Term Debt | - | - | $91.4 million |
| Shareholders' Equity | - | - | $902.8 million |
| Net Interest Margin | 3.85% | 3.78% | - |
| Allowance for Loan Losses | - | - | $142.7 million (2.41% of loans) |
| Tier 1 Capital Ratio | - | - | 13.43% |
Material Changes vs. Prior Period
- Net Income Decline: Net income for the third quarter decreased by $10.9 million (23%) compared to the same period in 2008. For the nine-month period, net income decreased by $49.4 million (32%).
- Provision for Credit Losses: The provision increased significantly by $7.1 million in the quarter and $39.1 million for the nine months, driven by increased risk in mortgage-related consumer lending, commercial and industrial, and commercial real estate portfolios due to economic weakness.
- Noninterest Income: Decreased by $16.7 million for the nine months, primarily due to the absence of a $13.7 million pre-tax gain from the mandatory redemption of Visa shares recorded in Q1 2008. However, mortgage banking income increased by $11.1 million due to higher refinancing activity.
- FDIC Insurance Expense: Increased by $3.0 million in the quarter and $13.3 million for the nine months, attributed to higher deposit balances, assessment rates, and a $5.7 million industry-wide assessment.
- Balance Sheet Strength: Total deposits increased by $958 million (12%) from year-end 2008. Long-term debt was reduced by $111.9 million (55%) using excess liquidity. Shareholders' equity increased by $112.1 million (14%) from year-end 2008.
Outlook, Risks, and Management Commentary
- Economic Environment: Management notes that Hawaii's economy continues to reflect weakness due to slow national conditions and lower visitor activity. The unemployment rate improved slightly to 7.2% as of September 30, 2009.
- Asset Quality Risks: Non-performing assets (NPAs) rose to $48.5 million, a significant increase from $14.9 million at year-end 2008. Higher risk exposure exists in residential home building ($38.6 million), residential land loans ($43.1 million), and air transportation portfolios.
- Investment Portfolio: The Company maintains a conservative investment strategy, holding significant excess reserves ($401.2 million) with the Federal Reserve and investing in high-grade U.S. Treasury and government agency mortgage-backed securities.
- Subsequent Events: On October 22, 2009, the Company sold its wholesale insurance business (Triad Insurance Agency), resulting in a pre-tax gain of approximately $1.5 million.
- FDIC Prepayment Proposal: The FDIC proposed requiring institutions to prepay assessments for 2010-2012. The Company estimates a potential prepaid assessment of approximately $45.7 million if the rule becomes final.
Key Facts for Investor Verification
- Credit Quality Deterioration: Verify the trend in non-performing assets, which more than tripled from year-end 2008 to $48.5 million, and the adequacy of the allowance for loan losses (2.41% coverage ratio).
- Revenue Concentration: Assess the impact of the one-time $13.7 million Visa gain in 2008 on year-over-year comparisons and the sustainability of mortgage banking income growth.
- Regulatory Capital: Confirm the Company's "well capitalized" status with a Tier 1 capital ratio of 13.43% and the impact of potential FDIC prepayment assessments on future liquidity.
- Asset Quality Segments: Review specific exposure in higher-risk categories, particularly residential construction and air transportation leveraged leases.
- Dividend Policy: Note the quarterly dividend of $0.45 per share declared in October 2009 and the cessation of share repurchases since October 2008 to preserve capital.