Bank of Hawaii Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; includes results for the fourth quarter. The company is a bank holding company headquartered in Honolulu, serving Hawaii, Guam, and other Pacific Islands through its principal subsidiary, Bank of Hawaii.
Financial performance and condition
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net income | $150.5 million | $166.1 million | Down 9% |
| Diluted EPS | $3.38 | $3.67 | Down $0.29 |
| Net interest income | $358.9 million | $377.3 million | Down 5% |
| Net interest margin | 2.81% | 2.97% | Down 16 basis points |
| Noninterest income | $186.2 million | $200.3 million | Down 7% |
| Noninterest expense | $331.0 million | $334.3 million | Down 1% |
| Provision for credit losses | $0 | $1.0 million | No provision in 2013 |
| Return on average assets / equity | 1.10% / 14.78% | 1.22% / 16.23% | Both declined |
- Fourth quarter: Net income was $39.1 million and diluted EPS was $0.88, down 3% and 2%, respectively, from Q4 2012. Tax-equivalent net interest income rose 2% to $94.8 million; net interest margin was 2.85%, down 2 basis points year over year. Mortgage banking income was a principal source of the quarterly decline in noninterest income.
- Balance sheet: Total assets were $14.1 billion, loans and leases $6.1 billion, deposits $11.9 billion, and shareholders’ equity $1.0 billion at year-end. Loans grew 4% and deposits 3% versus year-end 2012.
- Credit quality: Allowance for loan and lease losses was $115.5 million, or 1.89% of loans, versus $128.9 million, or 2.20%, a year earlier. Net charge-offs were $13.4 million, or 0.23% of average loans, compared with $10.7 million, or 0.19%, in 2012. Nonperforming assets rose to $39.7 million from $37.1 million; the NPA ratio increased to 0.65% from 0.63%.
- Cash flow: Net cash from operating activities was $242.0 million; investing activities used $471.3 million; financing activities provided $340.2 million. Cash and cash equivalents increased $110.9 million to $463.7 million.
- Liquidity and funding: Available-for-sale securities had a carrying value of $2.2 billion. The company reported remaining borrowing capacity of $1.1 billion at the FHLB and $657.8 million at the FRB, subject to collateral. Long-term debt was $174.7 million, including $150 million of FHLB advances.
- Capital and shareholder returns: The company and Bank were classified as well capitalized. Company Tier 1 capital, total capital, and leverage ratios were 15.55%, 16.81%, and 7.07%, respectively. The company paid $80.5 million in cash dividends and repurchased $35.5 million of shares during 2013; the annual dividend declared was $1.80 per share.
Material changes versus 2012
- Net income fell primarily as net interest income declined $18.4 million and mortgage banking income declined $16.5 million, partly offset by lower expenses, higher trust and asset management income, and lower income tax expense.
- Mortgage banking income decreased 46% to $19.2 million as higher mortgage rates reduced refinancing activity and loan-sale margins. Trust and asset management income increased 6% to $47.9 million.
- Commercial loans and leases grew 9%, led by commercial mortgage and commercial and industrial lending. Residential mortgage balances declined 3%.
- Unrealized losses on investment securities increased as market interest rates rose. The company transferred $579.9 million of available-for-sale securities to held-to-maturity for capital management; other comprehensive income was a loss of $61.0 million, and year-end equity declined 1%.
- Nonperforming assets increased, partly due to a $6.4 million Guam commercial and industrial loan placed on non-accrual. Troubled debt restructurings increased to $63.7 million from $41.1 million.
Outlook, risks, contingencies, and unusual items
- Management provided no specific quantitative earnings or revenue guidance. It said net interest margin had improved in the second half of 2013 and could improve further if rates remain higher or rise, while noting that any benefit may take time to emerge.
- Management characterized Hawaii’s economy as healthy, citing record visitor arrivals, low unemployment, rising real estate prices, and stronger construction activity. The company remains exposed to local economic conditions, especially tourism, real estate, government and defense spending, and natural disasters.
- Key risks include interest-rate and securities valuation changes, credit deterioration, regulatory and compliance costs, competition, cybersecurity and operational disruption, litigation, and dependence of the Parent’s liquidity on dividends from the Bank. Hawaii’s lengthy judicial foreclosure process may delay recovery on problem mortgage loans.
- The company reported $117.6 million of gross unrealized securities losses at year-end, primarily attributed to interest-rate changes; management reported no other-than-temporary impairment. Further rate increases could reduce the fair value of available-for-sale securities and pressure capital.
- Credit commitments totaled $2.39 billion, including $2.31 billion of unfunded commitments to extend credit. The filing states commitments may expire undrawn. Mortgage loan-sale representations and warranties create potential repurchase exposure; ten loans totaling $3.7 million were repurchased in 2013 without losses, and no repurchase requests were pending at year-end.
- Basel III capital requirements were scheduled to begin phasing in for the company in 2015; management expected the company to remain well capitalized under the new rules. Initial stress-test results were due to the Federal Reserve by March 31, 2014. The filing notes possible adverse industry effects from proposed debit interchange rule changes, with the company-specific impact not determinable.
- Unusual items included a $3.4 million release of state tax reserves following the close of a state audit and a $0.8 million valuation-allowance release, both benefiting 2013 tax expense. In January 2014, a lessee exercised an early buy-out option on an aircraft leveraged lease, reducing lease balances by $18.7 million and causing a nominal after-tax loss.
Ernst & Young issued an unqualified opinion on the consolidated financial statements and internal controls over financial reporting as of December 31, 2013.
Important facts for investors to verify
- Whether margin improvement continues and offsets ongoing loan and securities repricing at lower yields.
- Whether the lower allowance remains adequate as the loan portfolio grows, given higher commercial charge-offs, the Guam exposure, and increased impaired loans and restructurings.
- The sensitivity of capital and reported equity to further interest-rate-driven declines in securities values, including the effects of the held-to-maturity transfer.
- The durability of mortgage banking and fee income after the sharp decline in refinancing-related activity.
- Whether regulatory requirements, foreclosure delays, and contingent commitments or mortgage repurchase obligations materially affect future costs, liquidity, or capital distributions.