Bank of Hawaii Corporation — Q3 2015 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. The Honolulu-based bank holding company serves Hawaii, Guam, and other Pacific Islands. Management described Hawaii’s economy as positive, citing stable tourism, low unemployment, construction activity, and a strong real estate market.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $97.9 million | $95.4 million | $292.4 million | $283.0 million |
| Net interest margin | 2.77% | 2.85% | 2.79% | 2.86% |
| Noninterest income | $43.2 million | $45.0 million | $141.5 million | $134.2 million |
| Noninterest expense | $91.9 million | $81.0 million | $262.4 million | $245.7 million |
| Net income | $34.3 million | $41.8 million | $117.9 million | $121.9 million |
| Diluted EPS | $0.79 | $0.95 | $2.71 | $2.75 |
- Q3 net income declined 18% year over year; nine-month net income declined 3%. Q3 return on average assets was 0.89% versus 1.15%; the efficiency ratio was 65.12% versus 57.74%.
- Loans and leases rose 11% from December 31, 2014, to $7.69 billion, with growth in commercial and consumer lending. Deposits increased 2% to $12.94 billion.
- Total assets were $15.16 billion and shareholders’ equity was $1.10 billion at quarter-end. Other debt was $270.8 million; repurchase-agreement borrowings were $632.1 million. The company reported $487.1 million in cash and cash equivalents, $2.28 billion in available-for-sale securities, and additional stated borrowing capacity of $1.1 billion from the FHLB and $592 million from the Federal Reserve, subject to collateral.
- Operating cash flow for the first nine months was $169.6 million, versus $133.7 million in 2014. Investing activities used $475.3 million and financing provided $257.2 million; cash and cash equivalents declined by $48.5 million to $487.1 million.
- Capital ratios at September 30 included a 14.11% Common Equity Tier 1 ratio, 15.37% total capital ratio, and 7.18% Tier 1 leverage ratio. The company said it remained “well capitalized.”
Material changes and unusual items
- Q3 expenses included a $9.5 million pretax impairment charge on six aircraft as the company moved to exit its remaining aircraft leases. A further $1.0 million expected loss on a pending aircraft-lease sale was recorded in other noninterest income. Management expected that sale to close in Q4 2015.
- First-nine-month securities gains included a $10.1 million gain from selling 95,000 Visa Class B shares. Management said it did not anticipate further Visa share sales during the remainder of 2015. Remaining Class B shares were carried at zero cost basis; possible future conversion-ratio reductions could trigger payments under agreements with buyers.
- The 2015 periods had no provision for credit losses, compared with negative provisions of $2.7 million for Q3 2014 and $4.9 million for the first nine months of 2014. The allowance was $104.0 million, or 1.35% of loans, versus $108.7 million, or 1.58%, at year-end 2014.
- Nonperforming assets were $29.5 million, 0.38% of loans and foreclosed real estate, compared with $30.1 million and 0.44% at year-end. Net charge-offs were $2.0 million in Q3 2015, versus $0.8 million in Q3 2014; consumer net charge-offs rose year to date.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or revenue guidance. Management said interest-rate sensitivity modeling indicated higher rates would increase net interest income, while lower rates would reduce it; a flatter or inverted yield curve could also weigh on results. These are model estimates based on assumptions, not guidance.
- Key disclosed risks include Hawaii economic or tourism weakness, interest-rate and securities-market changes, credit quality, competition, regulation, litigation, operational and cybersecurity events, and the cost or availability of liquidity and capital.
- Credit commitments totaled $2.54 billion, including $2.48 billion of unfunded commitments to extend credit; actual funding may be lower because commitments can expire undrawn. The company also disclosed $7.0 million of residential mortgage loans in foreclosure proceedings and $66.3 million of loans modified as troubled debt restructurings.
- Management said pending and threatened legal proceedings were not expected, based on currently available information, to result in material losses beyond established reserves, while noting unexpected developments could cause losses to exceed reserves. Mortgage repurchase exposure was described as not material; there were no pending repurchase requests at quarter-end.
- The board declared a $0.45-per-share quarterly dividend in October 2015. The company repurchased 628,119 shares for $38.9 million during the first nine months, with $36.9 million of program authority remaining at September 30.
Important facts for investors to verify
- Whether aircraft dispositions close as expected and whether further impairment or sale losses arise.
- Whether loan growth, credit quality, consumer charge-offs, and the 1.35% allowance remain consistent with management’s assumptions.
- Whether margin pressure from low asset yields and repurchase funding costs offsets loan-volume growth.
- How much of the $2.54 billion in credit commitments is funded, and whether liquidity, collateral availability, and capital remain adequate.
- Potential effects of Visa litigation and conversion-ratio changes, legal contingencies, and regulatory developments on earnings and capital returns.