Bank of Hawaii Corporation Second Quarter 2014 Financial Results

Bank of Hawaii Corporation (NYSE:BOH) today reported diluted earnings per share of $0.94 for the second quarter of 2014, up from $0.87 in the previous quarter and $0.85 in the same quarter last year. Net income for the second quarter of 2014 was $41.5 million, an increase of $2.9 million or 7.5 percent compared with net income of $38.6 million in the first quarter of 2014, and up $3.7 million or 9.9 percent from net income of $37.8 million in the second quarter of 2013.

Loan and lease balances increased to $6.4 billion at June 30, 2014, up 3.5 percent from March 31, 2014 and 9.7 percent compared with June 30, 2013. Deposit growth remained strong during the quarter, as balances increased to $12.7 billion at June 30, 2014, up 5.2 percent from March 31, 2014 and 10.7 percent from June 30, 2013.

“Bank of Hawaii Corporation continued to perform well during the second quarter of 2014,” said Peter Ho, Chairman, President, and CEO. “Loan balances grew and we continue to increase customer deposits. Our margin was relatively stable at 2.86 percent, asset quality continued its strong trend, and expenses remain well controlled.”

The return on average assets for the second quarter of 2014 was 1.17 percent, up from 1.12 percent in the previous quarter and during the same quarter last year. The return on average equity for the second quarter of 2014 was 15.87 percent, an increase from 15.15 percent for the first quarter of 2014 and 14.64 percent in the second quarter of 2013.

For the six-month period ended June 30, 2014, net income was $80.1 million, an increase from net income of $73.7 million during the same period last year. Diluted earnings per share were $1.81 for the first half of 2014, up from diluted earnings per share of $1.65 for the first half of 2013. The year-to-date return on average assets for the six-month period ended June 30, 2014 was 1.14 percent, up from 1.10 percent for the same six months in 2013. The year-to-date return on average equity was 15.51 percent, up from 14.37 percent for the six months ended June 30, 2013.

Financial Highlights

Net interest income, on a taxable equivalent basis, for the second quarter of 2014 was $97.3 million, up $1.2 million from net interest income of $96.1 million in the first quarter of 2014 and up $7.5 million from net interest income of $89.8 million in the second quarter of 2013. Net interest income for the first half of 2014 was $193.3 million, an increase of $12.5 million compared with net interest income of $180.8 million for the first half of 2013. Analyses of the changes in net interest income are included in Tables 8a, 8b, and 8c.

The net interest margin was 2.86 percent for the second quarter of 2014, down 1 basis point from the net interest margin of 2.87 percent in the first quarter of 2014 and a 9 basis point increase from the net interest margin of 2.77 percent in the second quarter of 2013. The net interest margin for the first six months of 2014 was 2.87 percent compared with 2.80 percent for the same six-month period last year.

Due to strong credit recoveries during the quarter and continued stability of asset quality, we recorded a negative provision for credit losses of $2.2 million during the second quarter of 2014. The Company did not record a provision for credit losses during the first quarter of 2014 or the first or second quarters of 2013.

Noninterest income was $44.5 million in the second quarter of 2014, a decrease of $0.3 million compared with noninterest income of $44.8 million in the first quarter of 2014, and a decrease of $3.6 million compared with noninterest income of $48.0 million in the second quarter of 2013. Noninterest income in the second quarter of 2014 included a gain of $2.0 million resulting from the sale of 23,500 Visa Class B shares (9,884 Class A equivalents). The Company also contributed 5,700 Visa Class B shares to the Bank of Hawaii Foundation. Noninterest income in the first quarter of 2014 included a gain of $2.0 million resulting from the sale of 22,000 Visa Class B shares (9,253 Class A equivalents). The contributions had no impact on noninterest expense; however, the contributions did favorably impact the effective tax rate for the first and second quarters of 2014. As of June 30, 2014, the Company has 452,914 Visa Class B shares remaining (190,496 Class A equivalents). Mortgage banking revenue was $1.8 million in the second quarter of 2014 compared with $2.0 million in the previous quarter and $5.8 million in the same quarter last year. Noninterest income for the first half of 2014 was $89.2 million, a decrease of $6.6 million compared with noninterest income of $95.8 million for the first half of 2013. The decrease was primarily due to a reduction of $8.4 million in mortgage banking income which was partially offset by gains of $4.0 million on the sale of 45,500 Visa Class B shares.

Noninterest expense was $81.1 million in the second quarter of 2014, down $2.5 million compared with $83.5 million in the first quarter of 2014, and down $0.1 million compared with $81.2 million in the second quarter last year. First quarter expenses include seasonal payroll-related expenses resulting from annual payments from the Company’s incentive compensation plans and higher payroll taxes. An analysis of noninterest expenses related to salaries and benefits is included in Table 9. Noninterest expense for the first half of 2014 was $164.6 million, a decrease of $1.0 million compared with noninterest expense of $165.6 million for the first half of 2013.

The efficiency ratio for the second quarter of 2014 was 58.38 percent, an improvement from 60.54 percent in the previous quarter and 59.96 percent in the same quarter last year. The efficiency ratio for the first half of 2014 was 59.46 percent down from 60.93 percent in the same period last year.

The effective tax rate for the second quarter of 2014 was 30.86 percent compared with 29.13 percent in the previous quarter and 30.33 percent during the same quarter last year. The lower effective tax rate in the first quarter of 2014 was primarily due to a $1.2 million credit for the release of reserves due to a settlement with the State of Hawaii related to prior year tax issues.

The Company’s business segments are defined as Retail Banking, Commercial Banking, Investment Services, and Treasury & Other. Results are determined based on the Company’s internal financial management reporting process and organizational structure. Selected financial information for the business segments is included in Tables 13a and 13b.

Asset Quality

The Company’s overall asset quality remained strong during the second quarter of 2014. Total non-performing assets were $34.4 million at June 30, 2014, down from $37.0 million at March 31, 2014, and down from $36.4 million at June 30, 2013. Non-performing assets remain above historical levels due to the lengthy judicial foreclosure process for residential mortgage loans. As a percentage of total loans and leases and foreclosed real estate, non-performing assets were 0.53 percent at June 30, 2014, down from 0.60 percent at March 31, 2014 and down from 0.62 percent at June 30, 2013.

Accruing loans and leases past due 90 days or more were $9.7 million at June 30, 2014, down slightly from March 31, 2014 and down from $10.6 million at June 30, 2013. Restructured loans and leases not included in non-accrual loans or accruing loans past due 90 days or more were $43.6 million at June 30, 2014 and primarily comprised of residential mortgage loans with lowered monthly payments to accommodate our borrowers’ financial needs for a period of time. More information on non-performing assets and accruing loans and leases past due 90 days or more is presented in Table 11.

The Company recorded a net recovery of loans and leases previously charged off of $1.9 million during the second quarter of 2014. Loan and lease charge-offs of $4.0 million during the quarter were more than offset by recoveries of $5.9 million. Net charge-offs during the first quarter of 2014 were $1.3 million, or 0.09 percent annualized of total average loans and leases outstanding, and were comprised of $4.0 million in charge-offs partially offset by recoveries of $2.7 million. Net charge-offs in the second quarter of 2013 were $2.3 million or 0.16 percent annualized of total average loans and leases outstanding, and were comprised of $4.7 million in charge-offs partially offset by recoveries of $2.4 million. Net recoveries in the first half of 2014 were $0.6 million compared with net charge-offs of $4.3 million, or 0.15 percent annualized of total average loans and leases outstanding for the first half of 2013.

The allowance for loan and lease losses was reduced to $113.8 million at June 30, 2014. The ratio of the allowance for loan and lease losses to total loans and leases was 1.77 percent at June 30, 2014, a decrease of 7 basis points from the previous quarter and commensurate with improvements in credit quality and the Hawaii economy. The reserve for unfunded commitments at June 30, 2013 was relatively unchanged at $5.9 million. Details of loan and lease charge-offs, recoveries, and the components of the total reserve for credit losses are summarized in Table 12.

Other Financial Highlights

Total assets were $14.84 billion at June 30, 2014, up from total assets of $14.26 billion at March 31, 2014 and $13.73 billion at June 30, 2013. Average total assets were $14.25 billion during the second quarter of 2014, up from $14.03 billion during the previous quarter and $13.57 billion during the same quarter last year.

The investment securities portfolio was $6.91 billion at June 30, 2014, down from $6.97 billion at March 31, 2014, and up from $6.84 billion at June 30, 2013. The portfolio remains largely comprised of securities issued by U. S. government agencies and included $4.70 billion in securities held to maturity and $2.21 billion in securities available for sale at June 30, 2014.

Total loans and leases increased to $6.43 billion at June 30, 2014, up from $6.21 billion at March 31, 2014 and $5.86 billion at June 30, 2013. Average total loans and leases were $6.27 billion during the second quarter of 2014, up from $6.10 billion during the first quarter of 2014 and $5.78 billion during the same quarter last year. Commercial loan growth was strong across all major categories during the second quarter of 2014. The total commercial loan portfolio was $2.69 billion at the end of the quarter, up from commercial loans of $2.57 billion at the end of the previous quarter and up from $2.40 billion at the end of the same quarter last year. Total consumer loans increased to $3.73 billion at the end of the second quarter of 2014, up from $3.64 billion at the end of the first quarter of 2014, and up from consumer loans of $3.46 billion at the end of the second quarter of 2013 in all loan categories. Loan and lease portfolio balances, including the higher risk loans and leases outstanding, are summarized in Table 10.

Total deposits were $12.67 billion at June 30, 2014, up from $12.04 billion at March 31, 2014 and $11.45 billion at June 30, 2013. The increase from the previous quarter was largely due to strong growth in short-term public and commercial deposits. Average total deposits were $12.03 billion in the second quarter of 2014, up from $11.81 billion during the previous quarter and $11.24 billion during the same quarter last year.

During the second quarter of 2014, the Company repurchased 220.3 thousand shares of common stock at a total cost of $12.49 million under its share repurchase program. The average cost was $56.70 per share repurchased. From the beginning of the share repurchase program initiated during July 2001 through June 30, 2014, the Company has repurchased 51.4 million shares and returned $1.89 billion to shareholders at an average cost of $36.72 per share.

The Company’s Board of Directors increased the authorization under the share repurchase program by an additional $100.0 million. This authorization, combined with previously announced authorizations of $1.90 billion, brings the total repurchase authority to $2.0 billion. From July 1 through July 25, 2014, the Company repurchased an additional 43.0 thousand shares of common stock at an average cost of $57.45 per share. Remaining buyback authority under the share repurchase program was $106.5 million at July 25, 2014.

Total shareholders’ equity was $1.05 billion at June 30, 2014, compared with $1.03 billion at March 31, 2014, and $1.0 billion at June 30, 2013. The ratio of tangible common equity to risk-weighted assets was 15.54 percent at the end of the second quarter of 2014, compared with 15.69 percent at the end of the first quarter of 2014 and 15.87 percent at the end of the same quarter last year. The Tier 1 leverage ratio at June 30, 2014 was 7.20 percent, down from 7.22 percent at March 31, 2014 and 7.29 percent at June 30, 2013.

The Company’s Board of Directors declared a quarterly cash dividend of $0.45 per share on the Company’s outstanding shares. The dividend will be payable on September 15, 2014 to shareholders of record at the close of business on August 29, 2014.

Hawaii Economy

General economic conditions in Hawaii continued to remain positive during the second quarter of 2014 due to an expanding construction industry, stable tourism, low unemployment, and a strong real estate market. For the first five months of 2014, total visitor spending increased 3.0 percent although total arrivals declined 0.5 percent compared to the same period in 2013. The statewide seasonally-adjusted unemployment rate was at 4.4 percent in June 2014 compared to 6.1 percent nationally. For the first six months of 2014, the volume of single-family home sales on Oahu increased 1.6 percent compared with the same period in 2013. The volume of condominium sales on Oahu increased 1.3 percent compared with the same period in 2013. The median price of single-family home sales and condominiums on Oahu was 7.1 percent higher for the first six months of 2014 compared to the same period in 2013. As of June 30, 2014, months of inventory of single-family homes and condominiums on Oahu remained low at approximately 2.8 months and 3.3 months, respectively. More information on current Hawaii economic trends is presented in Table 15.

Conference Call Information

The Company will review its second quarter 2014 financial results today at 6:00 p.m. Eastern Time (12:00 p.m. Hawaii Time). The conference call will be accessible via teleconference and via the Investor Relations link of Bank of Hawaii Corporation’s web site, www.boh.com. Conference call participants located in the United States or Canada should dial 1 (800) 708-4540. Other international conference call participants should dial 1 (847) 619-6397. Use the pass code “Bank of Hawaii” to access the call. A replay will be available for one week beginning on Monday, July 28, 2014 by dialing 1 (888) 843-7419 in the United States or Canada and 1 (630) 652-3042 from other international locations. Enter the pass code number 37638750# when prompted. A replay of the conference call will also be available via the Investor Relations link on the Company’s website, www.boh.com.

Forward-Looking Statements

This news release, and other statements made by the Company in connection with it may contain "forward-looking statements,” such as forecasts of our financial results and condition, expectations for our operations and business prospects, and our assumptions used in those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results might differ significantly from our forecasts and expectations because of a variety of factors. More information about these factors is contained in Bank of Hawaii Corporation's Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the U.S. Securities and Exchange Commission. We have not committed to update forward-looking statements to reflect later events or circumstances.

Bank of Hawaii Corporation is a regional financial services company serving businesses, consumers, and governments in Hawaii, American Samoa, and the West Pacific. The Company’s principal subsidiary, Bank of Hawaii, was founded in 1897 and is the largest independent financial institution in Hawaii. For more information about Bank of Hawaii Corporation, see the Company’s web site, www.boh.com.