Business context and reporting period
Bank of Hawaii Corporation filed this Form 10-K for the fiscal year ended December 31, 2012. The Honolulu-based bank holding company provides retail and commercial banking, investment, trust, leasing, and related services primarily in Hawaii, Guam, and other Pacific Islands. The filing also reports fourth-quarter results; it is not a standalone quarterly filing.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Net income | $166.1 million | $160.0 million |
| Diluted EPS | $3.67 | $3.39 |
| Net interest income | $377.3 million | $390.2 million |
| Net interest margin | 2.97% | 3.13% |
| Total noninterest income | $200.3 million | $197.7 million |
| Total noninterest expense | $334.3 million | $348.2 million |
| Provision for credit losses | $1.0 million | $12.7 million |
| ROA / ROE | 1.22% / 16.23% | 1.22% / 15.69% |
| Efficiency ratio | 57.88% | 59.23% |
| Loans and leases at year-end | $5.85 billion | $5.54 billion |
| Deposits at year-end | $11.53 billion | $10.59 billion |
| Total assets / shareholders’ equity | $13.73 billion / $1.02 billion | $13.85 billion / $1.00 billion |
Net cash provided by operating activities was $222.5 million; investing activities used $261.4 million and financing activities used $278.1 million. Cash and cash equivalents ended the year at $352.9 million, down from $669.9 million. The filing describes liquidity as strong: year-end available-for-sale securities were $3.37 billion, and additional borrowing capacity was reported at $1.0 billion from the FHLB and $685 million from the Federal Reserve, subject to pledged collateral.
Year-end long-term debt was $128.1 million, including a new $100 million FHLB advance at 0.60%, maturing in December 2015. Repurchase-agreement funding fell to $758.9 million from $1.93 billion, largely as local government funds moved into time deposits. The Bank was classified as well capitalized; its Tier 1 capital, total capital, and leverage ratios were 15.63%, 16.89%, and 6.63%, respectively.
Changes versus the prior comparable period
- Net income increased 4% and diluted EPS increased 8%. Higher mortgage banking income, lower credit-loss provision, and lower noninterest expense more than offset declining net interest income and debit-card revenue.
- Net interest income declined 3%, while net interest margin fell 16 basis points, reflecting lower yields on loans and securities. Deposit costs declined, partly offsetting asset-yield pressure.
- Mortgage banking income rose to $35.6 million from $14.7 million, supported by refinancing and loan-sale volume and stronger sale margins. Originations increased 28% to $1.2 billion and sales increased 38% to $600.9 million.
- Debit-card income decreased $10.9 million, or 42%, primarily due to Durbin Amendment interchange pricing limits. The prior-year comparison also included $6.4 million of net securities gains versus a nominal net loss in 2012.
- Credit quality improved overall: net charge-offs declined to $10.7 million, or 0.19% of average loans, from $21.4 million, or 0.40%; nonperforming assets fell to $37.1 million from $40.8 million. The allowance declined to $128.9 million, or 2.20% of loans, from $138.6 million, or 2.50%.
- Deposits grew 9% and loans and leases grew 6%. Shareholders’ equity increased 2%; the company repurchased 1.7 million shares for $79.5 million and paid $81.6 million in cash dividends.
Outlook, commentary, risks, and unusual items
Management cited continued improvement in Hawaii’s economy and said loan-growth prospects could improve in 2013, but remained cautious about the national recovery, interest rates, loan demand, government fiscal and budget challenges, and regulatory change. Hawaii recorded 8.0 million visitors in 2012, up 9.6%; visitor spending rose 18.7%, and the state unemployment rate was 5.2% in December. No specific earnings or revenue guidance was provided.
- Key exposures include dependence on Hawaii and Pacific Island economies, tourism, real estate and military activity; interest-rate and margin pressure; borrower credit deterioration; and concentrations in residential land loans, certain home-equity loans, and air transportation leases.
- Management identified regulatory uncertainty, including Dodd-Frank, proposed Basel III capital and liquidity rules, and stress testing scheduled to begin in October 2013. Their eventual impact was uncertain.
- 2012 results included a $3.5 million pretax gain from early buyouts of two cargo-ship leases and a $1.0 million pretax loss on an aircraft lease sale and termination. Lower 2012 expense also reflected the absence of the $9.0 million overdraft-litigation settlement accrual recorded in 2011. The 2011 tax provision benefited from discrete tax credits that did not recur in 2012.
- Management recorded no impairment on its $60.2 million FHLB stock investment, citing the FHLB’s improved regulatory classification; future impairment remained a risk if the FHLB’s financial condition worsened.
- Mortgage-loan sale and servicing agreements include representations and warranties that may require repurchase in specified circumstances. The company repurchased seven loans totaling $2.2 million in 2012 without losses and reported no pending repurchase requests at year-end. Management had not established a liability for these potential losses, which it considered not material based on historical experience.
- The company reported various pending or threatened legal matters and believed outcomes would not materially exceed accrued amounts, while noting unexpected developments could affect a particular period. It also disclosed $15.4 million of unrecognized tax benefits; the timing and amount of possible resolution were uncertain.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and financial-reporting controls were effective at year-end.
Important facts for investors to verify
- Whether net interest margin and asset yields stabilize, and whether deposit growth can continue at acceptable funding costs.
- Whether mortgage banking income remains sustainable after unusually strong refinancing and loan-sale activity in 2012.
- Whether improving credit trends continue, particularly in residential mortgages, higher-risk home equity, air transportation leases, and neighbor-island lending; assess allowance adequacy alongside charge-offs and delinquencies.
- The effects of repurchase-agreement runoff, time-deposit concentration and maturities, pledged collateral, and new or future regulatory liquidity and capital requirements.
- Developments in mortgage representations-and-warranties claims, foreclosure timelines, litigation, tax examinations, and the FHLB stock investment.
- Capital returns and dividend capacity, including regulatory limits on Bank dividends to the parent and remaining repurchase authorization.