Bank of Hawaii Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless otherwise noted. Bank of Hawaii serves Hawaii, Guam, and other Pacific Islands. Financial statements are unaudited.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $126.0 million | $124.8 million, Q1 2019 |
| Noninterest income | $46.1 million | $43.7 million, Q1 2019 |
| Total revenue, net interest income plus noninterest income | $172.1 million | $168.5 million, Q1 2019 |
| Provision for credit losses | $33.6 million | $3.0 million, Q1 2019 |
| Noninterest expense | $96.3 million | $93.1 million, Q1 2019 |
| Net income / diluted EPS | $34.7 million / $0.87 | $58.8 million / $1.43, Q1 2019 |
| Net interest margin | 2.96% | 3.12%, Q1 2019 |
| Efficiency ratio | 55.96% | 55.22%, Q1 2019 |
| Loans and leases | $11.35 billion | $10.99 billion |
| Deposits | $16.06 billion | $15.78 billion |
| Allowance for credit losses | $138.2 million; 1.22% of loans | $110.0 million; 1.00% of loans |
| Total shareholders’ equity | $1.33 billion | $1.29 billion |
Net income declined 41% year over year, chiefly because the provision for credit losses rose by $30.6 million amid COVID-19-related economic uncertainty. Net interest income increased 1%, while net interest margin fell 16 basis points. Noninterest income rose 6%, including higher customer interest-rate-swap fees; noninterest expense increased 3%.
Cash flow and liquidity: Operating cash flow was negative $4.9 million, versus positive $17.1 million in Q1 2019; investing cash flow was negative $351.0 million and financing cash flow positive $353.9 million. Cash and cash equivalents ended the quarter at $556.7 million, down $1.9 million from year-end. The company reported $2.8 billion of additional FHLB borrowing capacity and $1.4 billion from the Federal Reserve, based on pledged collateral. Management described liquidity and capital as strong.
Debt and capital: At March 31, the balance sheet included $603.2 million of repurchase-agreement borrowings, $75.0 million of funds purchased, $75.0 million of short-term borrowings, and $60.5 million of other debt. Regulatory capital ratios were 11.81% common equity Tier 1, 13.06% total capital, and 7.12% Tier 1 leverage; the company said it was well-capitalized. In March, it suspended share repurchases; Q1 repurchases totaled $17.6 million and cash dividends paid were $26.8 million. The board declared a subsequent quarterly dividend of $0.67 per share, payable June 12, 2020.
Material changes and notable items
- Loans grew $361.9 million, or 3%, from year-end. Commercial loans increased $316.7 million, including growth in commercial and industrial lending as customers sought liquidity amid COVID-19.
- The company adopted CECL on January 1, 2020. The initial adoption adjustment reduced total credit-loss reserves by $5.1 million and increased retained earnings by $3.6 million after tax. The Q1 provision subsequently reflected expected lifetime losses and the changed COVID-19 outlook; management changed its consumer-loss forecast reversion method in response to heightened uncertainty.
- Net charge-offs were $3.7 million, or 0.14% of average loans on an annualized basis, broadly unchanged from Q1 2019. Nonperforming assets were $20.6 million, or 0.18% of loans and foreclosed real estate.
- Other comprehensive income was $41.9 million, mainly reflecting unrealized gains on investment securities; accumulated other comprehensive income moved from a $31.1 million deficit at year-end to positive $10.8 million.
- Mortgage servicing rights included a $2.5 million valuation allowance provision. A one-time insurance commission boosted Q1 2019 annuity and insurance income, making the year-over-year comparison lower in 2020.
Outlook, risks, and contingencies
The filing gives no specific earnings or revenue guidance. Management emphasized substantial uncertainty about the pandemic’s duration and economic effects. Hawaii’s tourism shutdown and related restrictions were expected to weigh on customers, credit quality, demand, and earnings; tourism-dependent borrowers and the company’s concentration in Hawaii and Pacific Island markets are key exposures. Management also cited possible higher credit losses, deposit and liquidity needs, interest-rate changes, operational disruption, and market volatility.
The company offered consumer relief, including payment assistance for up to six months, and commercial principal deferrals or shorter interest and principal deferrals. Through April 28, 2020, after quarter-end, the Bank had processed more than 3,300 PPP loans totaling over $575 million. Loan modifications granted under COVID-19 relief were not being treated as troubled debt restructurings under applicable relief guidance.
An overdraft-fee class action settlement had preliminary court approval; the company had an $8.0 million reserve, with final approval scheduled for July 6, 2020. Management said other legal matters were not expected to result in losses materially above reserves, but unexpected developments could create materially greater losses. Credit commitments totaled $2.68 billion. The filing also describes affordable-housing unfunded commitments of $32.7 million.
Most important facts for investors to verify
- How COVID-19 impacts Hawaii tourism, borrowers, delinquencies, and future credit-loss provisions, and whether the $138.2 million loan allowance remains adequate.
- Subsequent loan-modification volumes, PPP loan performance and forgiveness, and any related funding or operational risks.
- Whether net interest margin and earnings remain under pressure as rates, loan yields, and deposit costs change.
- Liquidity, borrowing capacity, regulatory capital, and the effect of the CECL transition on future reported capital.
- Final court approval and settlement costs for the $8.0 million overdraft-fee case, and any changes in other legal or mortgage-related contingencies.