Bank of Hawaii Corporation — Q2 2017 Form 10-Q
Business context and period. Bank of Hawaii provides financial services in Hawaii, Guam, and other Pacific Islands. This unaudited quarterly report covers the three and six months ended June 30, 2017; balance-sheet comparisons are to December 31, 2016.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Net interest income | $112.3 million | $103.6 million | +8% |
| Noninterest income | $45.2 million | $46.5 million | -3% |
| Net income | $44.7 million | $44.2 million | +1% |
| Diluted EPS | $1.05 | $1.03 | +2% |
| Net interest margin | 2.92% | 2.85% | +7 bps |
| Efficiency ratio | 55.99% | 57.35% | Improved |
| Return on average assets | 1.09% | 1.14% | Lower |
- First-half results: Net income was $95.8 million versus $94.5 million; diluted EPS was $2.24 versus $2.19. Net interest income rose 8% to $222.2 million, while noninterest income declined 2% to $101.2 million. The credit-loss provision was $8.7 million, compared with a $1.0 million provision release in the prior-year period.
- Balance sheet at June 30: Assets were $17.0 billion; loans and leases were $9.39 billion, up 5% from year-end; deposits were $14.78 billion, up 3%; shareholders’ equity was $1.21 billion. Consumer lending drove most loan growth, while deposits grew mainly from time deposits.
- Credit and capital: Allowance for loan and lease losses was $106.4 million, or 1.13% of loans, versus 1.17% at year-end. Nonperforming assets fell to $16.4 million from $19.8 million; the NPA ratio was 0.17%. Regulatory capital ratios were 13.34% CET1, 14.58% total capital, and 7.37% Tier 1 leverage; the Company reported that it remained well capitalized.
- Debt and liquidity: Other debt was $267.9 million, including $250 million of FHLB advances; repurchase-agreement funding was $505.3 million. Cash and cash equivalents were $874.2 million. Additional borrowing capacity was $1.9 billion from the FHLB and $675.5 million from the Federal Reserve, based on pledged collateral.
- Cash flow, first half: Operating activities provided $97.9 million, investing activities used $484.4 million, and financing activities provided $381.1 million. Cash and cash equivalents declined $5.4 million from the beginning of the period to $874.2 million.
Material changes and notable items
- Higher loan balances and a shift in earning-asset mix toward loans helped lift net interest income and margin. Deposit growth funded much of the balance-sheet expansion; time-deposit costs increased.
- Credit costs increased year over year: first-half net charge-offs were $6.6 million, versus net recoveries of $2.1 million in the first half of 2016, which included recovery of a previously charged-off commercial loan. Management considered reserves adequate.
- First-half noninterest income included an approximately $12.5 million gain on sale of Visa Class B shares. A $1.3 million year-over-year decline in other noninterest income mainly reflected lower gains on leased-asset sales.
- Q2 2016 comparisons benefited from a $1.3 million release of state tax reserves and gains on real estate sales; these items contributed to higher comparative tax and occupancy expenses in 2017.
- The Company repurchased $21.3 million of shares and paid $42.8 million in dividends in the first half. In July, the Board declared a quarterly dividend of $0.52 per share, payable September 15, 2017.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management described Hawaii’s economy as positive, citing tourism, construction, low unemployment, and a robust real estate market.
- Interest-rate simulations estimated that a gradual parallel 200-basis-point increase would raise annual net interest income by 3.8%, while a 200-basis-point decrease would reduce it by 2.2%. An immediate 200-basis-point increase was estimated to raise it 9.5%, and a decrease to reduce it 6.6%. A flatter or inverted yield curve could reduce net interest income. These are model estimates, not forecasts.
- Key disclosed risks include Hawaii economic or tourism weakness, interest-rate and market changes, credit deterioration, competition, regulatory and tax changes, litigation, cyber or operational disruption, vendor failures, and natural disasters. The loan portfolio is concentrated in Hawaii, including real-estate lending.
- Legal proceedings arise in the ordinary course; management did not expect losses materially above recorded reserves based on information then available, but noted unexpected developments could cause greater losses. Mortgage repurchase exposure was considered not material and no related requests were pending at June 30.
- Management expected the new lease standard to affect the balance sheet and the expected-credit-loss standard (CECL) to affect financial statements, particularly credit reserves; the ultimate impact was still being evaluated. The 2016 cash-flow comparative was corrected for an immaterial presentation error, with no effect on income or balance-sheet statements.
Important facts for investors to verify
- Whether loan growth and margin gains continue to offset rising deposit costs, operating expenses, and credit provisions.
- Consumer credit performance, net charge-offs, allowance adequacy, and trends in nonperforming residential mortgages and troubled-debt restructurings.
- Deposit mix and funding costs, the availability and terms of secured borrowing capacity, and liquidity under stress.
- The sustainability of earnings excluding Visa share-sale gains and other prior-period comparison items.
- The assumptions and eventual financial effects of CECL and lease-accounting adoption, and the impact of interest-rate or Hawaii economic changes.