Business context and reporting period
Bank of Hawaii Corporation filed this unaudited Form 10-Q for the quarter ended March 31, 2024. The company provides consumer and commercial banking and related financial services, primarily in Hawaii and the Pacific Islands. Comparisons below are with Q1 2023 for income and cash flow, and December 31, 2023 for balance-sheet figures.
Key financial results
| Metric | Q1 2024 / March 31, 2024 | Comparable period |
|---|---|---|
| Interest income | $210.4 million | $188.3 million in Q1 2023 |
| Interest expense | $96.4 million | $52.4 million in Q1 2023 |
| Net interest income | $113.9 million; net interest margin 2.11% | $136.0 million; margin 2.47% in Q1 2023 |
| Provision for credit losses | $2.0 million | $2.0 million in Q1 2023 |
| Noninterest income / expense | $42.3 million / $105.9 million | $40.7 million / $111.9 million in Q1 2023 |
| Net income / diluted EPS | $36.4 million / $0.87 | $46.8 million / $1.14 in Q1 2023 |
| Common dividend declared | $0.70 per share | $0.70 per share in Q1 2023 |
- Net income declined 22% and diluted EPS declined 24% year over year. Return on average common equity was 11.20%, versus 15.79%.
- Net interest income fell 16% as deposit and other funding costs rose faster than asset yields. The taxable-equivalent net interest margin fell 36 basis points; average earning-asset yield rose 47 basis points while the cost of interest-bearing liabilities rose 111 basis points.
- Q1 cash flows were $56.8 million provided by operating activities, $244.1 million provided by investing activities, and $410.4 million used in financing activities. Cash and cash equivalents ended the quarter at $891.5 million, down from $1.001 billion at year-end 2023.
- Total assets were $23.4 billion, down 1% from year-end. Loans and leases were $13.9 billion, down 1%; investment securities were $7.3 billion, down 2%; deposits were $20.7 billion, down 2%; and shareholders’ equity was $1.436 billion, up 2%.
- Deposits decreased $378.5 million: consumer balances rose $109.2 million, while commercial and public/other balances fell $277.9 million and $209.8 million, respectively. Adjusted uninsured deposits were $8.606 billion; the filing labels the March regulatory uninsured-deposit balance preliminary.
- Other debt was $560.2 million, principally $550 million of FHLB advances; repurchase agreements totaled $150.5 million. No short-term borrowings were outstanding at quarter-end. The company reported remaining borrowing capacity of $7.4 billion at the Federal Reserve Discount Window and $2.0 billion at FHLB Des Moines.
- Common Equity Tier 1, Tier 1, total capital, and Tier 1 leverage ratios were 11.50%, 12.74%, 13.81%, and 7.62%, respectively, all higher than at year-end. March 31 regulatory ratios are preliminary; management characterized the company as well-capitalized.
Material changes versus comparable periods
- Interest expense increased $44.0 million year over year, with deposit interest expense increasing $51.3 million. Average time deposits rose 72%, reflecting customer migration to higher-rate products.
- Noninterest income increased 4%, supported in part by trust and asset-management income and bank-owned life insurance income. Noninterest expense decreased 5%, primarily because salaries and benefits fell $6.9 million, including lower separation expense.
- Consumer Banking net income increased 10% to $32.8 million; Commercial Banking net income declined 11% to $29.6 million. Treasury and Other recorded a $26.1 million loss, versus a $16.4 million loss, primarily reflecting higher funding costs.
- Loans and leases declined $111.2 million from year-end. Commercial and industrial and construction balances grew, while commercial mortgage and consumer balances contracted.
- Allowance for credit losses on loans and leases increased to $147.7 million from $146.4 million at year-end, or 1.07% of loans versus 1.05%. Net charge-offs were $2.3 million, or 0.07% annualized, compared with $2.7 million, or 0.08%, in Q1 2023.
- Accumulated other comprehensive loss improved to $383.6 million from $396.7 million at year-end, partly due to $13.1 million of other comprehensive income. The securities portfolio nevertheless had approximately $1.1 billion of gross unrealized losses at March 31.
Outlook, risks, contingencies and unusual items
- The filing provides no numerical earnings, revenue, margin, or credit-loss guidance. Management said Hawaii’s economy remained resilient: visitor spending rebounded after the Maui wildfires, construction is expected to expand with rebuilding and housing work, and statewide unemployment was 3.1% in March. Management also noted housing affordability challenges and a possible slowdown in job gains across most industries.
- Interest-rate risk is significant. The company’s model estimates that a parallel +200-basis-point shock would increase forward annual net interest income by 5.0%, while a -200-basis-point shock would reduce it by 9.1%. A +400-basis-point shock would reduce modeled economic value of equity by 29.9%. These are model estimates, not forecasts; results depend on assumptions, particularly deposit repricing and mortgage prepayments.
- Available-for-sale and held-to-maturity securities had substantial unrealized losses, which management attributed primarily to interest-rate changes rather than credit deterioration. Management stated it did not intend to sell loss-position securities and did not expect to be forced to sell before recovery, while citing available liquidity.
- Credit risk includes concentration in Hawaii and a substantial real-estate lending portfolio. The allowance includes a qualitative overlay for economic uncertainty and recession downside risk. Nonperforming assets were $11.8 million, or 0.09% of loans and foreclosed real estate; accruing loans 90 days or more past due were $6.3 million.
- Credit commitments totaled $3.40 billion, including $3.29 billion of unfunded commitments to extend credit. Management said legal proceedings are in the ordinary course and does not expect outcomes materially beyond reserves based on information currently available, but unexpected developments could result in materially higher losses.
- Other disclosed risks include changes in interest rates and funding costs, local tourism and economic conditions, credit quality, regulation, competition, cyber and operational disruptions, third-party service providers, natural disasters, and litigation. The company reported no material changes to its 2023 Form 10-K risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
- No shares were repurchased under the public share repurchase program in Q1; 53,746 shares were acquired for employee tax withholding and deferred-compensation obligations. Remaining program authority was $126.0 million. The common dividend of $0.70 per share was payable June 14, 2024, to holders of record May 31, 2024.
Important facts for investors to verify
- Whether deposit pricing and customer migration to higher-cost time deposits continue to pressure net interest margin and earnings.
- Deposit trends, uninsured and adjusted uninsured balances, and the company’s ability to maintain liquidity without selling securities at a loss.
- Changes in unrealized securities losses, interest-rate sensitivity, and the assumptions used in deposit-repricing and mortgage-prepayment models.
- Credit trends in commercial real estate and consumer lending, including delinquencies, modifications, charge-offs, nonperforming assets, and adequacy of the allowance.
- Whether loan and deposit balances, capital ratios, and cash flows develop consistently with management’s characterization of a strong balance sheet; March regulatory capital and uninsured-deposit figures are preliminary.
- Any subsequent developments in legal matters, contingent commitments, or the impact of Maui wildfire recovery, tourism, and local economic conditions.