Bank of Hawaii Corporation (BOH) — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results. The company provides banking and financial services in Hawaii, Guam, and other Pacific Islands.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $126.7 million | $124.1 million | $252.7 million | $248.9 million |
| Provision for credit losses | $40.4 million | $4.0 million | $74.0 million | $7.0 million |
| Net income | $38.9 million | $56.9 million | $73.7 million | $115.7 million |
| Diluted EPS | $0.98 | $1.40 | $1.85 | $2.82 |
| Net interest margin | 2.83% | 3.04% | 2.90% | 3.08% |
| Efficiency ratio | 49.95% | 54.69% | 52.90% | 54.95% |
Q2 net income declined 32% year over year, principally reflecting the sharply higher credit-loss provision and reduced transaction-related fees. The reported provision reflected CECL estimates of expected lifetime losses amid COVID-19 uncertainty. Net interest income rose modestly on higher earning assets and commercial loan growth, but lower asset yields reduced margin. Noninterest income included a $13.2 million net securities gain, primarily from selling the company’s remaining Visa Class B shares, generating a $14.2 million gain.
For the first half, operating cash flow was $35.8 million, versus $100.0 million in 2019; investing cash outflow was $1.096 billion and financing cash inflow was $1.547 billion. Cash and cash equivalents ended June at $1.046 billion. These cash-flow amounts reflect the bank’s balance-sheet and deposit activity.
Balance sheet, liquidity, credit, and capital
- Size and growth: Total assets were $19.77 billion at June 30, up from $18.10 billion at year-end 2019. Loans and leases were $11.81 billion, up 7%; deposits were $17.42 billion, up 10%.
- Funding and liquidity: Cash and cash equivalents were $1.046 billion; available-for-sale securities were $2.73 billion. Additional borrowing capacity was reported at $2.9 billion from the FHLB and $1.5 billion from the Federal Reserve. Securities sold under repurchase agreements totaled $603.2 million.
- Debt: Other debt was $60.5 million, including $50.0 million of FHLB advances and $10.5 million of capital lease obligations. The company also had $603.2 million of repurchase-agreement funding.
- Credit quality and reserves: The loan allowance was $173.4 million, or 1.47% of loans, compared with $110.0 million and 1.00% at year-end. Nonperforming assets were $22.7 million, or 0.19% of loans and foreclosed real estate, versus $20.1 million and 0.18% at year-end. Net charge-offs were $5.1 million in Q2, annualized at 0.18% of average loans.
- COVID-19 assistance: At June 30, short-term COVID-related concessions covered $1.1 billion across 886 commercial loans and leases and $795.5 million across 16,414 consumer loans and leases. The company had 4,482 PPP loans outstanding totaling $543.3 million; these loans are SBA-guaranteed and potentially forgivable.
- Capital and shareholder returns: Shareholders’ equity was $1.35 billion. The company reported a 12.04% CET1 ratio, 13.29% total capital ratio, and 6.90% Tier 1 leverage ratio, and stated it was well-capitalized. It suspended share repurchases in March; first-half dividends paid were $53.7 million. In July, the board declared a $0.67 per-share quarterly dividend.
Material changes and unusual items
- Q2 noninterest income increased 13%, largely due to the Visa share sale. Excluding such one-off support, underlying fee trends were pressured: fees, exchange, and other service charges fell 34% and deposit service charges fell 30% year over year.
- Management attributed fee declines to lower card and merchant activity, suspended ATM surcharges, and waived overdraft fees during Q2. Mortgage banking income improved with higher conforming loan sales.
- Commercial loans grew substantially, in part from PPP originations; commercial and industrial balances rose 42% from year-end 2019. PPP loans yield 1%, with fees amortized as appropriate.
- The company adopted CECL on January 1, 2020. The adoption reduced total reserves by $5.1 million and increased retained earnings by $3.6 million after tax; later COVID-related economic assumptions drove a much larger provision.
- Investment securities gains lifted reported noninterest income, while investment securities’ unrealized gains increased with lower interest rates. Management said it did not expect credit losses in the securities portfolio and did not intend to sell securities in unrealized-loss positions.
- Net interest margin fell 21 basis points in Q2 year over year. Management cited lower loan and securities yields, partly offset by reduced deposit funding costs.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management described the near-term Hawaii economy as highly uncertain, particularly because tourism had been sharply curtailed by travel restrictions and quarantine requirements. It warned that the duration and severity of COVID-19, the pace of recovery, borrower performance, collateral values, and resulting credit losses could materially affect results. Management considered reserves appropriate at June 30 but noted CECL estimates and earnings could be volatile as forecasts and portfolio conditions change.
Other disclosed risks include interest-rate and market exposure, operational and cyber risks, regulatory changes, and litigation. A proposed overdraft-fee class settlement included an $8.0 million reserve; the court indicated substantive approval in July, subject to the CAFA notice period expiring September 25, 2020. A separate proposed class action alleges unpaid PPP agent fees; the filing states that litigation was seeking multidistrict consolidation. The company also reported $2.75 billion of credit commitments, which may not be fully drawn.
Important facts for investors to verify
- Whether Hawaii tourism, employment, and borrower cash flows recover as assumed, and how that affects the allowance and future credit provisions.
- Performance of the $1.90 billion in COVID-related loan and lease concessions, including subsequent deferrals, delinquencies, and modifications.
- PPP forgiveness timing, fee recognition, and any exposure from the PPP agent-fee litigation.
- Whether fee income and net interest margin stabilize after temporary fee waivers, reduced transaction volumes, and lower market rates.
- Capital and liquidity trends, including continued repurchase suspension, dividend decisions, and the actual availability and terms of contingent borrowing sources.
- Reconciliation of allowance figures: the financial statements report a $173.4 million loan allowance at June 30, while one MD&A financial-highlights line lists $172.0 million; the filing text does not clearly explain this difference.