Business context and reporting period
Bank of Hawaii Corporation filed this unaudited Form 10-Q for the quarter ended March 31, 2011. The company provides banking and financial services in Hawaii, Guam, and other Pacific Islands.
Key financial metrics
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Net interest income | $99.7 | $107.7 |
| Provision for credit losses | $4.7 | $20.7 |
| Noninterest income | $53.9 | $71.8 |
| Noninterest expense | $86.1 | $81.7 |
| Net income | $42.4 | $52.7 |
| Diluted earnings per share | $0.88 | $1.09 |
| Dividend declared per share | $0.45 | $0.45 |
| Net interest margin | 3.24% | 3.72% |
| Efficiency ratio | 56.04% | 45.54% |
| Return on average assets / equity | 1.32% / 16.86% | 1.73% / 22.54% |
- Revenue and earnings: Net interest income plus noninterest income totaled $153.6 million, down 14% year over year. Net income declined 20%.
- Cash flow: Operating activities provided $66.4 million, investing activities provided $144.7 million, and financing activities used $170.8 million. Cash and cash equivalents increased $40.3 million to $647.8 million during the quarter.
- Balance sheet and liquidity: Total assets were $12.96 billion, loans and leases $5.33 billion, and deposits $9.91 billion at March 31. Cash and cash equivalents were $647.8 million; available-for-sale securities were $4.05 billion. Management described liquidity as strong.
- Credit quality: The allowance for loan and lease losses was $147.4 million, or 2.77% of loans. Nonperforming assets were $34.6 million, down from $37.8 million at December 31, 2010; net charge-offs were $4.7 million, or 0.36% of average loans on an annualized basis.
- Debt and capital: Long-term debt was $32.6 million. Securities sold under agreements to repurchase were $1.75 billion. The company reported Tier 1 and total capital ratios of 18.41% and 19.68%, respectively, and said the company and bank were well-capitalized.
Material changes versus comparable periods
- Net interest income fell 7% year over year and net interest margin declined 48 basis points, mainly reflecting lower yields on loans and securities and a lower average loan balance. Lower deposit costs partly offset the pressure.
- Noninterest income declined 25%, principally because net securities gains fell to $6.1 million from $20.0 million. Deposit service charges fell 28%; management attributed much of the decline in overdraft fees to Regulation E opt-in requirements and processing changes.
- The credit-loss provision fell 77% year over year, consistent with lower nonperforming assets and net charge-offs. Noninterest expense rose 5%, including higher salaries and benefits and other operating costs.
- Loans and leases were nearly unchanged from year-end, while deposits increased $23.4 million. Repurchase-agreement balances fell $156.0 million and total assets declined $164.5 million from December 31.
- The company transferred approximately $2.2 billion of available-for-sale securities to held-to-maturity. No gain or loss was recognized on transfer; related after-tax unrealized gains of about $8.2 million remain in accumulated other comprehensive income. A $19.5 million after-tax unrealized securities loss during the quarter reduced accumulated other comprehensive income.
Outlook, management commentary, risks and unusual items
- Management said Hawaii’s economy was improving, citing higher visitor arrivals and spending, but remained cautious about the economy, interest rates, and weak loan demand. The filing provides no formal earnings guidance.
- Management said a lower allowance may be appropriate in future periods if economic and credit-quality improvements continue and there is no significant deterioration. The allowance was unchanged from year-end.
- The March 2011 Japan earthquake and tsunami could reduce Japanese tourism to Hawaii and affect the regional economy; management said the impact could not yet be predicted. Rising energy prices and regulation were also cited as concerns.
- Management reported plans to continue share repurchases during 2011, subject to market conditions and other factors. The company repurchased 442,500 program shares for approximately $20.8 million in Q1; $43.1 million of authorization remained. In April, the board declared a $0.45-per-share quarterly dividend.
- Risk concentrations identified by management included residential home building, residential land, higher-risk home equity loans, and air-transportation leasing. Interest-rate risk, regulatory changes (including Dodd-Frank and Basel III), and the tourism outlook were also highlighted.
- A purported class action filed in February alleges improper overdraft fees on debit-card transactions. The company could not estimate a possible loss or range. Management said other pending legal matters were not expected to materially affect financial position, while noting an unfavorable outcome could affect results in a particular period.
- The company reported $2.8 billion of securities pledged to secure governmental deposits and repurchase agreements. Its $61.3 million investment in Federal Home Loan Bank of Seattle stock was not impaired; redemption timing was uncertain because the FHLB remained undercapitalized under its regulator’s classification.
Important facts for investors to verify
- Whether lower loan yields, subdued loan demand, and the 48-basis-point year-over-year net interest margin decline persist.
- Whether credit quality continues improving and supports any future allowance reduction, particularly in the identified higher-risk lending portfolios.
- The financial and tourism impact of the Japan disaster, energy prices, and related regional economic conditions.
- Developments in the overdraft-fee lawsuit, mortgage-loan repurchase exposure, and the FHLB stock’s recoverability and redemption prospects.
- The effects of the securities reclassification, interest-rate movements, and evolving regulatory capital and liquidity requirements on earnings, equity, and capital.