Bank of Hawaii Corporation — Q3 2021 Form 10-Q
Business context and reporting period. The unaudited quarter and nine months ended September 30, 2021 cover the company’s banking and financial services operations in Hawaii, Guam, and other Pacific Islands. The business is concentrated in Hawaii, including real estate lending and customers exposed to tourism. Comparisons below are to Q3 and the first nine months of 2020, unless otherwise noted.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $126.8 million | $124.2 million | $370.9 million | $376.8 million |
| Noninterest income | $41.4 million | $41.7 million | $128.8 million | $139.2 million |
| Noninterest expense | $96.5 million | $89.9 million | $291.9 million | $275.2 million |
| Net income | $62.1 million | $37.8 million | $189.5 million | $111.5 million |
| Diluted EPS | $1.52 | $0.95 | $4.70 | $2.80 |
| Net interest margin | 2.32% | 2.67% | 2.37% | 2.82% |
| Efficiency ratio | 57.38% | 54.22% | 58.42% | 53.33% |
Credit costs and asset quality. The provision for credit losses was a net benefit of $10.4 million in Q3 2021, versus an expense of $28.6 million in Q3 2020; for the first nine months it was a net benefit of $40.8 million, versus an expense of $102.6 million. The loan-and-lease allowance was $167.9 million, or 1.39% of loans, at September 30, down from $216.3 million, or 1.81%, at December 31, 2020. Q3 net charge-offs were $1.2 million, or 0.04% annualized. Nonperforming assets were $20.6 million, or 0.17% of loans and foreclosed real estate.
Balance sheet, liquidity, and capital. At September 30, total assets were $23.0 billion, deposits $20.5 billion, loans and leases $12.1 billion, and shareholders’ equity $1.6 billion. Deposits rose $2.3 billion and loans rose $132.7 million from year-end 2020; investment securities increased to $9.3 billion. Cash and cash equivalents were $656.0 million, and available-for-sale securities were $4.4 billion. The company reported $2.9 billion of additional FHLB borrowing capacity and $0.8 billion from the Federal Reserve. Repurchase agreements were $450.5 million, down $150.1 million, and other debt was $10.4 million, down from $60.5 million at year-end. Regulatory ratios included CET1 of 12.02%, Tier 1 capital of 13.47%, total capital of 14.72%, and Tier 1 leverage of 7.10%; management said the company and Bank were well-capitalized.
Cash flow. For the first nine months, operating activities provided $340.3 million, investing activities used $2.46 billion, and financing activities provided $2.16 billion. Cash and cash equivalents increased $41.9 million to $656.0 million. Investing outflows largely reflected purchases of investment securities; financing inflows included deposit growth and $175.5 million of preferred-stock proceeds.
Material changes versus comparable periods
- Q3 net income rose 64% and diluted EPS rose 60%; nine-month net income rose 70%. The improvement chiefly reflected lower credit-loss provisions, rather than stronger net interest margin.
- Q3 net interest income increased 2.1%, but net interest margin fell 35 basis points. Management attributed the margin pressure to lower rates and excess liquidity from deposit growth, partly offset by PPP loan fees.
- Noninterest expense increased 7.3% in Q3 and 6.1% for the nine-month period. Salary and benefit costs and other expenses increased; the efficiency ratio worsened.
- Noninterest income was nearly flat in Q3 but declined for the nine-month period, partly because 2020 included a $11.1 million net securities gain, primarily from the sale of Visa Class B shares. 2021 included fees related to prior Visa share sales.
- Deposits grew faster than loans, supporting a substantial expansion in the securities portfolio. Unrealized securities losses increased as interest rates rose; accumulated other comprehensive loss was $48.6 million at quarter-end, versus income of $7.8 million at year-end 2020.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no specific earnings or financial guidance. Management described the Hawaii economy as still facing significant challenges despite increased tourism and government stimulus, and noted uncertainty related to COVID-19 and the Delta variant.
- Credit and pandemic exposure: COVID-related payment-relief programs had ended, but the company continued working with affected customers. Pandemic-related modifications totaled $137.9 million at September 30, 2021, compared with $489.7 million at December 31, 2020. Management cautioned that borrowers’ ability to resume contractual payments remained uncertain; qualifying modifications were not treated as troubled debt restructurings under applicable relief provisions.
- Interest-rate and securities risks: Management’s simulation estimated annual net interest income would increase 6.3% under a gradual 200-basis-point rise and decrease 1.7% under a gradual 100-basis-point decline; immediate shocks produced larger estimated changes. These are model estimates subject to assumptions. A flatter or inverted yield curve could reduce net interest income.
- Capital and shareholder actions: The company issued Series A preferred stock in June, raising $175.5 million net, with a 4.375% non-cumulative dividend rate. It resumed common-stock repurchases in July; 241,332 shares were repurchased under the program during the first nine months. The board declared post-quarter dividends of $0.70 per common share and $0.2735 per preferred depositary share.
- Unusual items: Q3 included a gain on sale of Guam property; reported occupancy expense also reflected property-sale gains, including $9.5 million from Oahu and Guam sales for the first nine months. Early termination costs related to repurchase agreements and FHLB advances also affected expenses; management cited $3.8 million of repurchase-agreement termination costs in Q3 and $7.0 million of total early-termination costs during the first nine months.
- Contingencies and other risks: The company faces ordinary-course legal proceedings; management did not expect outcomes to materially exceed reserves based on information available, but said unexpected developments could result in materially larger losses. Disclosed risks include Hawaii tourism and economic conditions, COVID-19, credit quality, interest rates, regulation, cybersecurity and operational disruption, litigation, and climate-related events and regulation.
Important facts for investors to verify
- Whether reserve releases remain appropriate as pandemic relief winds down, and how delinquencies, nonperforming assets, charge-offs, and deferred loans develop.
- Whether deposit growth and liquidity continue to pressure net interest margin, and how actual results compare with the filing’s rate-sensitivity simulations.
- The effect of rising rates and any further unrealized losses on the securities portfolio, accumulated other comprehensive income, and regulatory capital.
- How recurring expense trends compare with reported results after property-sale gains and debt-prepayment costs are considered.
- The terms, dividend declarations, and capital implications of the Series A preferred stock, alongside common dividends and resumed repurchases.
Financial statements are unaudited interim statements; the filing cautions that interim results are not necessarily indicative of full-year or future results.