Bank of Hawaii Corporation Second Quarter 2017 Financial Results

Bank of Hawaii Corporation (NYSE: BOH) today reported diluted earnings per share of $1.05 for the second quarter of 2017, down from diluted earnings per share of $1.20 in the previous quarter and up from diluted earnings per share of $1.03 in the same quarter last year. Net income for the second quarter of 2017 was $44.7 million compared with net income of $51.2 million in the first quarter of 2017 and net income of $44.2 million in the second quarter of 2016. Income for the first quarter of 2017 included sales of $12.5 million in Visa Class B shares. There were no sales of Visa shares during the second quarter of 2017 or the second quarter of 2016.

Loan and lease balances increased to $9.4 billion at June 30, 2017, up 3.0 percent from March 31, 2017 and up 12.7 percent compared with June 30, 2016. Deposits grew 2.1 percent during the second quarter as balances increased to $14.8 billion at June 30, 2017 compared with $14.5 billion at March 31, 2017 and $13.6 billion at June 30, 2016.

“Bank of Hawaii Corporation continued to perform well during the second quarter of 2017,” said Peter Ho, Chairman, President and CEO. “Our loans and deposits continued to grow, our margin improved, expenses were well controlled, and our asset quality remains strong. We are also pleased to increase the dividend to our shareholders for the third time in the past eighteen months.”

The return on average assets for the second quarter of 2017 was 1.09 percent, down from 1.26 percent in the previous quarter and 1.14 percent in the same quarter last year. The return on average equity for the second quarter of 2017 was 14.87 percent, down from 17.63 percent for the first quarter of 2017 and 15.56 percent in the second quarter of 2016. The efficiency ratio for the second quarter of 2017 was 55.99 percent compared with 53.42 percent in the previous quarter and 57.35 percent in the same quarter last year.

For the six-month period ended June 30, 2017, net income was $95.8 million, an increase of $1.4 million from net income of $94.5 million during the same period last year. Diluted earnings per share were $2.24 for the first half of 2017, an increase from diluted earnings per share of $2.19 for the first half of 2016. The return on average assets for the six-month period ended June 30, 2017 was 1.17 percent compared with 1.22 percent for the same six months in 2016. The year-to-date return on average equity was 16.22 percent for the first half of 2017 compared with 16.71 percent for the six month period ended June 30, 2016. The efficiency ratio for the first half of 2017 improved to 54.67 percent compared with 56.08 percent in the same period last year.

Financial Highlights

Net interest income, on a taxable equivalent basis, for the second quarter of 2017 was $115.3 million, an increase of $2.4 million compared with net interest income of $112.9 million in the first quarter of 2017 and an increase of $8.8 million compared with net interest income of $106.5 million in the second quarter of 2016. Net interest income for the first half of 2017 was $228.3 million, an increase of $15.7 million compared with net interest income of $212.6 million for the first half of 2016. Analyses of the changes in net interest income are included in Tables 8a, 8b and 8c.

The net interest margin was 2.92 percent for the second quarter of 2017, up 3 basis points from the net interest margin of 2.89 percent in the previous quarter and a 7 basis point increase from the net interest margin of 2.85 percent in the second quarter of 2016. The net interest margin for the first six months of 2017 was 2.90 percent compared with 2.86 percent for the same six-month period last year.

Results for the second quarter of 2017 included a provision for credit losses of $4.3 million compared with a provision for credit losses of $4.4 million in the previous quarter and a provision for credit losses of $1.0 million in the same quarter last year. The provision for credit losses during the first half of 2017 was $8.7 million compared with a negative provision of $1.0 million during the same period in 2016. Provision expense for the first half of 2016 reflects a recovery of $6.6 million related to one commercial client in Guam.

Noninterest income was $45.2 million in the second quarter of 2017, a decrease of $10.7 million compared with noninterest income of $55.9 million in the first quarter of 2017 and a decrease of $1.3 million compared with noninterest income of $46.5 million in the second quarter of 2016. There were no significant items in noninterest income during the second quarter of 2017. Noninterest income in the first quarter of 2017 included the previously mentioned gain of $12.5 million resulting from the sale of 90,000 Visa Class B shares. Noninterest income in the second quarter of 2016 included a service fee of $1.2 million resulting from the sale of trust real estate. Noninterest income for the first half of 2017 was $101.2 million, a decrease of $1.5 million compared with noninterest income of $102.7 million for the first half of 2016.

Noninterest expense was $88.2 million in the second quarter of 2017, a decrease of $0.4 million compared with noninterest expense of $88.6 million in the first quarter of 2017 and an increase of $2.1 million compared with noninterest expense of $86.1 million in the second quarter last year. There were no significant items in noninterest expense during the second quarter of 2017. Noninterest expense in the first quarter of 2017 included seasonal payroll expenses of approximately $2.5 million. Noninterest expense in the second quarter of 2016 included a net gain of $1.3 million from the sale of bank-owned real estate property. An analysis of noninterest expenses related to salaries and benefits is included in Table 9. Noninterest expense for the first half of 2017 was $176.8 million, an increase of $3.3 million compared with noninterest expense of $173.5 million for the first half of 2016.

The effective tax rate for the second quarter of 2017 was 31.37 percent compared with 29.72 percent in the previous quarter and 29.77 percent in the same quarter last year. The lower effective tax rate for the first quarter of 2017 was due to the adoption of an accounting change related to the exercise of stock options and the vesting of restricted stock. The lower effective tax rate in second quarter of 2016 was primarily due to the release of state tax reserves. The effective tax rate for the first half of 2017 was 30.50 percent compared with 30.98 percent during the same period last year.

The Company’s business segments are defined as Retail Banking, Commercial Banking, Investment Services, and Treasury & Other. Their 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 asset quality continued to remain solid during the second quarter of 2017. Total non-performing assets were $16.4 million at June 30, 2017, down $2.6 million from non-performing assets of $19.0 million at March 31, 2017 and up $0.1 million from non-performing assets of $16.3 million at June 30, 2016. As a percentage of total loans and leases, including foreclosed real estate, non-performing assets were 0.17 percent at the end of the second quarter of 2017, down from 0.21 percent at the end of the first quarter of 2017 and down from 0.20 percent at the end of the second quarter last year.

Accruing loans and leases past due 90 days or more were $7.0 million at June 30, 2017, up from $5.9 million at March 31, 2017 and down from $8.8 million at June 30, 2016. Restructured loans not included in non-accrual loans or accruing loans past due 90 days or more were $53.2 million at June 30, 2017, an increase from $53.0 million at March 31, 2017 and $52.2 million at June 30, 2016. More information on non-performing assets and accruing loans and leases past due 90 days or more is presented in Table 11.

Net loan and lease charge-offs during the second quarter of 2017 were $3.0 million or 0.13 percent annualized of total average loans and leases outstanding. Loan and lease charge-offs of $5.5 million during the quarter were partially offset by recoveries of $2.5 million. Net charge-offs during the first quarter of 2017 were $3.6 million or 0.16 percent annualized of total average loans and leases outstanding and comprised of $5.7 million in charge-offs and recoveries of $2.1 million. Net charge-offs during the second quarter of 2016 were $1.7 million or 0.09 percent annualized of total average loans and leases outstanding and comprised of $3.7 million in charge-offs and recoveries of $2.0 million. Net charge-offs during the first half of 2017 were $6.6 million or 0.15 percent annualized of total average loans and leases outstanding compared with net recoveries of $2.1 million for the first half of 2016. Results for the first half of 2016 include the previously mentioned recovery related to one commercial client in Guam.

The allowance for loan and lease losses increased to $106.4 million at June 30, 2017 compared with $105.1 million at March 31, 2017 and $103.9 million at June 30, 2016. The ratio of the allowance for loan and lease losses to total loans and leases was 1.13 percent at June 30, 2017, a decrease of 2 basis points from the previous quarter and 12 basis points from the second quarter last year. The allowance for loan and lease losses at June 30, 2017 is commensurate with the Company’s asset quality and the Hawaii economy. As a result of continued strong growth in Hawaii commercial lending, the reserve for unfunded commitments was increased to $6.8 million at June 30, 2017 compared with the reserve for unfunded commitments of $6.6 million at March 31, 2017 and June 30, 2016. 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 $17.0 billion at June 30, 2017, up from total assets of $16.7 billion at March 31, 2017 and up from total assets of $15.9 billion at June 30, 2016. Average total assets increased to $16.5 billion during the second quarter of 2017, up from $16.4 billion during the previous quarter and $15.6 billion during the same quarter last year.

The investment securities portfolio was $6.1 billion at June 30, 2017, down from $6.2 billion at March 31, 2017 and up from $6.0 billion at June 30, 2016. The portfolio remains largely comprised of securities issued by U. S. government agencies and included $3.8 billion in securities held to maturity and $2.3 billion in securities available for sale at June 30, 2017.

Total loans and leases were $9.4 billion at June 30, 2017, up from total loans and leases of $9.1 billion at March 31, 2017 and up from total loans and leases of $8.3 billion at June 30, 2016. Average total loans and leases increased to $9.2 billion during the second quarter of 2017, up from $9.0 billion during the previous quarter and $8.2 billion during the same quarter last year.

The commercial loan portfolio was $3.7 billion at June 30, 2017, up from $3.6 billion at March 31, 2017 and $3.3 billion at June 30, 2016. The consumer loan portfolio was $5.7 billion at June 30, 2017, up from $5.5 billion at March 31, 2017 and $5.0 billion at June 30, 2016. Loan and lease portfolio balances are summarized in Table 10.

Total deposits were $14.8 billion at June 30, 2017, up from total deposits of $14.5 billion at March 31, 2017 and up from total deposits of $13.6 billion at June 30, 2016. Average total deposits increased to $14.3 billion during the second quarter of 2017, up from $14.2 billion during the previous quarter and $13.5 billion during the same quarter last year.

Consumer deposits were $7.3 billion at June 30, 2017, up from $7.2 billion at March 31, 2017 and $6.6 billion at June 30, 2016. Commercial deposits were $5.9 billion at June 30, 2017, down from $6.1 billion at March 31, 2017 and up from $5.7 billion at June 30, 2016. Other deposits, including public funds, were $1.6 billion at June 30, 2017, up from $1.2 billion at March 31, 2017 and $1.3 billion at June 30, 2016. Deposit balances are summarized in Tables 7 and 10.

During the second quarter of 2017, the Company repurchased 123.1 thousand shares of common stock at a total cost of $9.9 million under its share repurchase program. The average cost was $80.28 per share repurchased. From the beginning of the share repurchase program initiated during July of 2001 through June 30, 2017, the Company has repurchased 53.9 million shares and returned over $2.0 billion to shareholders at an average cost of $38.04 per share. Remaining buyback authority under the share repurchase program was $45.5 million at June 30, 2017. From July 3 through July 21, 2017, the Company repurchased an additional 42.0 thousand shares of common stock at an average cost of $82.52 per share.

Total shareholders’ equity increased to $1.2 billion at June 30, 2017. At June 30, 2017, the Tier 1 Capital Ratio was 13.34 percent compared with 13.41 percent at March 31, 2017 and 13.66 percent at June 30, 2016. The Tier 1 leverage ratio at June 30, 2017 was 7.37 percent compared with 7.29 percent at March 31, 2017 and June 30, 2016.

The Company’s Board of Directors declared a quarterly cash dividend of $0.52 per share on the Company’s outstanding shares. The dividend will be payable on September 15, 2017 to shareholders of record at the close of business on August 31, 2017.

Hawaii Economy

Economic conditions in Hawaii continue to remain positive due to the active construction industry, growing tourism and a strong real estate market. The statewide seasonally-adjusted unemployment rate in Hawaii remains among the lowest in the United States at 2.7 percent in June 2017 compared to 4.4 percent nationally. For the first five months of 2017, total visitor spending increased 9.8 percent and visitor arrivals increased 4.2 percent compared to the same period in 2016. Year-to-date, all four of Hawaii’s largest visitor markets, U. S. West, U. S. East, Japan, and Canada, have reported strong growth compared with the first five months of 2016. For the first six months of 2017, the volume of single-family home sales on Oahu increased 4.4 percent compared with the same period in 2016. The volume of condominium sales on Oahu increased 6.0 percent compared with the same period in 2016. During the first half of 2017 the median sales price of single-family homes on Oahu was 3.2 percent higher and the median sales price of a condominium was 3.6 percent higher compared with 2016. As of June 30, 2017, months of inventory of single-family homes and condominiums on Oahu remained low at approximately 2.7 months and 2.8 months, respectively. More information on current Hawaii economic trends is presented in Table 15.

Conference Call Information

The Company will review its second quarter 2017 financial results today at 2:00 p.m. Eastern Time (8:00 a.m. Hawaii Time). The call will be accessible via teleconference and via the investor relations link of Bank of Hawaii Corporation's website, www.boh.com. The toll-free number is 1 (844) 543-5235 in the United States and 1 (703) 318-2209 for international callers. Use the pass code “Bank of Hawaii” to access the call. A replay will be available for one week beginning approximately 11:00 a.m. Hawaii Time on Monday, July 24, 2017. The replay number is 1 (855) 859-2056 in the United States and 1 (404) 537-3406 from international locations. Enter the pass code 47737328 when prompted. Participants can also dial 1 (800) 585-8367 to access the replay. In addition, a replay will be available 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, 2016, 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. For more information about Bank of Hawaii Corporation, see the Company’s web site, www.boh.com.