Bank of Hawaii Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; fourth-quarter results are also summarized. Bank of Hawaii is a bank holding company headquartered in Honolulu, serving Hawaii, Guam, and other Pacific Islands through Retail Banking, Commercial Banking, Investment Services, and Treasury and Other.
Financial performance and condition
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net interest income | $390.2 million | $406.5 million | Down 4% |
| Noninterest income | $197.7 million | $255.3 million | Down 23% |
| Noninterest expense | $348.2 million | $346.2 million | Up 1% |
| Provision for credit losses | $12.7 million | $55.3 million | Down 77% |
| Net income | $160.0 million | $183.9 million | Down 13% |
| Diluted EPS | $3.39 | $3.80 | Down 11% |
- Margins and returns: Net interest margin was 3.13%, down from 3.41%; return on average assets was 1.22% versus 1.45%, and return on average equity was 15.69% versus 18.16%. The efficiency ratio rose to 59.23% from 52.32%.
- Fourth quarter: Net income was $39.2 million, down 3% year over year; diluted EPS was $0.85 versus $0.84. Net interest margin was 3.04%, down from 3.15%. Noninterest income excluding securities gains declined 16% year over year.
- Balance sheet: Total assets were $13.85 billion, up from $13.13 billion. Loans and leases were $5.54 billion, up 4%; deposits were $10.59 billion, up 7%. Total shareholders’ equity was $1.00 billion, roughly flat.
- Credit quality: Net charge-offs fell to $21.4 million, or 0.40% of average loans, from $51.6 million, or 0.94%. The allowance for loan and lease losses was $138.6 million, or 2.50% of loans, compared with $147.4 million, or 2.76%. Nonperforming assets increased to $40.8 million from $37.8 million; nonaccrual loans and leases were 0.68% of loans versus 0.67%.
- Liquidity and funding: Cash and cash equivalents were $669.9 million; available-for-sale securities were $3.45 billion, and total investment securities had a carrying value of about $7.1 billion. Securities sold under repurchase agreements totaled $1.93 billion. Long-term debt was $30.7 million. The Company reported strong liquidity and undrawn credit lines of approximately $709.7 million at the Federal Reserve and $947.4 million at the FHLB.
- Capital and shareholder returns: The Company and Bank were classified as well capitalized. Company Tier 1, total capital, and leverage ratios were 16.68%, 17.95%, and 6.73%, respectively. The Company repurchased 2.5 million shares for $109.9 million and paid $84.9 million in cash dividends; annual dividends declared were $1.80 per share.
- Cash flows: Operating activities provided $229.7 million; investing activities used $708.1 million; financing activities provided $540.8 million. Cash and cash equivalents increased by $62.4 million to $669.9 million.
Material changes versus 2010
- Earnings fell mainly because of lower net interest income, reduced securities gains, and weaker deposit-fee income. Net securities gains declined to $6.4 million from $42.8 million.
- Deposit service charges fell 27%; overdraft fees declined 37% to $21.3 million, reflecting processing changes and Regulation E. The Durbin Amendment also reduced debit-card interchange income in the fourth quarter.
- Lower credit-loss provisioning and lower net charge-offs partly offset weaker revenue. Management attributed improving credit metrics to a gradually recovering Hawaii economy.
- Average loans and leases declined, while year-end loan balances rose. Deposits increased, and the Company placed excess liquidity into investment securities.
- The Company reclassified approximately $3.2 billion of available-for-sale securities to held-to-maturity. No gain or loss was recognized on the transfer; related after-tax unrealized gains remain in accumulated other comprehensive income and are amortized over the securities’ estimated remaining lives.
Outlook, risks, and unusual items
- Management was cautiously optimistic about continued economic recovery and prospects for loan growth, but identified weak loan demand, low interest rates, and fee-revenue pressure as concerns. No quantified earnings or revenue guidance was provided.
- Management expected the full-year 2012 impact of Durbin Amendment compliance to significantly reduce debit-card income. It planned to maintain liquidity, credit reserves, and capital, while continuing expense management; four branch consolidations were announced in late 2011.
- Key risks include dependence on Hawaii and Pacific Island economies, tourism and real estate conditions, interest-rate and net-interest-margin exposure, credit deterioration, competition, regulatory costs and uncertainty from Dodd-Frank and Basel III, foreclosure delays under Hawaii law, cybersecurity and operational risk, and litigation and reputational risk.
- A $9.0 million overdraft-litigation settlement was accrued in 2011 and received final court approval in February 2012. The filing also reports $13.6 million of unrecognized tax benefits and notes that tax examinations and certain tax matters remain unresolved.
- The FHLB remained classified as undercapitalized by its regulator and restricted from redeeming stock or paying dividends. Bank of Hawaii held $61.3 million of FHLB stock and recorded no impairment at year-end, based on management’s recoverability assessment.
- A subsequent event says a lessee exercised early buy-out options on two cargo-ship leases in January 2012, generating a stated pretax gain of $3.5 million and after-tax gain of $6.2 million. Those figures appear inconsistent; verify against the underlying filing or subsequent disclosure.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective disclosure controls and internal controls at year-end.
Important facts for investors to verify
- Whether fee-income declines from overdraft and debit-card rule changes persist, and the size of the Durbin Amendment’s 2012 effect.
- Whether the improving charge-off trend continues, given slightly higher nonperforming assets and concentrations in residential mortgages, home equity, and air-transportation leases.
- The valuation, duration, liquidity, and accounting treatment of the large investment-securities portfolio, including the $3.2 billion transfer to held-to-maturity.
- The sustainability of capital returns and dividends, considering regulatory constraints on Bank dividends to the Parent and planned repurchases.
- Developments affecting FHLB stock recoverability, the overdraft settlement, remaining tax matters, and mortgage repurchase or servicing claims.
- The January 2012 lease buy-out gain: the reported after-tax amount exceeds the stated pretax amount and warrants clarification.