Bank of Hawaii(BOH) - 2023 Q3 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements (Unaudited) Presents the unaudited consolidated financial statements for the periods ended September 30, 2023 - The statements are prepared per U.S. GAAP for interim reporting and include all necessary adjustments for fair presentation[103][225] Consolidated Statements of Income Net income for Q3 2023 was $47.9 million, a decrease driven by lower net interest income Consolidated Income Statement Highlights (Q3 2023 vs Q3 2022) | Metric (in thousands, except per share) | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Net Interest Income | $120,937 | $141,655 | | Provision for Credit Losses | $2,000 | $0 | | Total Noninterest Income | $50,334 | $30,660 | | Total Noninterest Expense | $105,601 | $105,749 | | Net Income | $47,903 | $52,801 | | Diluted EPS | $1.17 | $1.28 | Consolidated Income Statement Highlights (Nine Months Ended Sep 30) | Metric (in thousands, except per share) | 2023 | 2022 | | :--- | :--- | :--- | | Net Interest Income | $381,240 | $399,820 | | Provision for Credit Losses | $6,500 | ($8,000) | | Total Noninterest Income | $134,326 | $116,369 | | Total Noninterest Expense | $321,556 | $312,562 | | Net Income | $140,806 | $164,497 | | Diluted EPS | $3.42 | $3.98 | Consolidated Statements of Comprehensive Income Comprehensive income improved to $29.7 million in Q3 2023 due to smaller unrealized losses on securities Comprehensive Income (Loss) (in thousands) | Period | Net Income | Other Comprehensive Loss | Comprehensive Income (Loss) | | :--- | :--- | :--- | :--- | | Q3 2023 | $47,903 | ($18,180) | $29,723 | | Q3 2022 | $52,801 | ($79,246) | ($26,445) | | Nine Months 2023 | $140,806 | ($6,953) | $133,853 | | Nine Months 2022 | $164,497 | ($381,312) | ($216,815) | Consolidated Statements of Condition Total assets were $23.55 billion, with modest growth in loans and deposits as of September 30, 2023 Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $23,549,785 | $23,606,877 | | Net Loans and Leases | $13,774,228 | $13,501,981 | | Investment Securities (AFS + HTM) | $7,475,337 | $8,258,962 | | Total Deposits | $20,802,309 | $20,615,696 | | Total Shareholders' Equity | $1,363,840 | $1,316,995 | Consolidated Statements of Shareholders' Equity Shareholders' equity grew to $1.364 billion, driven by net income partially offset by dividends and buybacks - Total Shareholders' Equity increased to $1,363.8 million at September 30, 2023, from $1,317.0 million at December 31, 2022[87] - For the nine months ended September 30, 2023, net income of $140.8 million was a primary driver of the increase in equity[87] - Key reductions to equity included cash dividends on common stock ($83.8 million), preferred stock ($5.9 million), and common stock repurchases ($14.1 million)[87] Consolidated Statements of Cash Flows Net cash increased by $250.5 million, with investing activities providing cash and financing activities using cash Cash Flow Summary (Nine Months Ended Sep 30, 2023, in thousands) | Activity | Amount | | :--- | :--- | | Net Cash Provided by Operating Activities | $124,570 | | Net Cash Provided by Investing Activities | $463,718 | | Net Cash Used in Financing Activities | ($337,829) | | Net Change in Cash and Cash Equivalents | $250,459 | Notes to Consolidated Financial Statements Details accounting policies, new standards, and provides breakdowns of key financial statement components Note 3. Investment Securities The company held $7.84 billion in securities, with unrealized losses of $1.35 billion due to interest rates Investment Securities Portfolio (Amortized Cost, in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Available-for-Sale | $2,752,093 | $3,172,436 | | Held-to-Maturity | $5,088,013 | $5,414,139 | | Total | $7,840,106 | $8,586,575 | - The company sold various corporate and municipal bonds from its AFS portfolio in Q3 2023, resulting in a realized loss of $4.6 million[117] - Gross unrealized losses of $365.3 million in AFS and $983.5 million in HTM securities as of Sep 30, 2023, were attributed to interest rate changes, not credit quality issues[92][244] - As of September 30, 2023, investment securities with a carrying value of $7.2 billion were pledged to secure deposits, repurchase agreements, and FRB discount window borrowing[116] Note 4. Loans and Leases and the Allowance for Credit Losses Total loans grew to $13.92 billion, with an Allowance for Credit Losses of $145.3 million (1.04% of loans) Loan and Lease Portfolio (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Commercial | $5,679,469 | $5,464,503 | | Consumer | $8,240,022 | $8,181,917 | | Total Loans and Leases | $13,919,491 | $13,646,420 | Allowance for Credit Losses (ACL) Activity (Nine Months Ended Sep 30, 2023, in thousands) | Description | Amount | | :--- | :--- | | Balance at Beginning of Period | $144,439 | | Net Charge-Offs | ($6,094) | | Provision for Credit Losses | $6,918 | | Balance at End of Period | $145,263 | - The ACL as of Sep 30, 2023, considered the impact of the Maui wildfires, factoring in insurance coverage and collateral values[141] - Non-accrual loans decreased to $10.5 million as of Sep 30, 2023, from $11.6 million at year-end 2022[164] Note 10. Business Segments Consumer and Commercial Banking were profitable, while the Treasury segment recorded a significant loss Net Income (Loss) by Business Segment (Nine Months Ended Sep 30, in thousands) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Consumer Banking | $103,222 | $57,026 | | Commercial Banking | $98,197 | $88,576 | | Treasury and Other | ($60,613) | $18,895 | | Consolidated Total | $140,806 | $164,497 | - The company's internal management accounting process, including funds transfer pricing and expense allocations, is used to measure segment performance[233][234] Note 11. Derivative Financial Instruments The company uses interest rate swaps to manage risk, with a notional hedging amount of $2.0 billion Derivative Financial Instruments (Notional Amounts, in thousands) | Instrument | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Designated as Hedges: | | | | Interest Rate Swaps | $2,000,000 | $0 | | Not Designated as Hedges: | | | | Interest Rate Swaps (Receive/Pay) | $4,010,552 | $3,642,866 | | Interest Rate Lock Commitments | $11,764 | $3,860 | - The company entered into pay-fixed, receive-floating interest rate swaps designated as fair value hedges to manage exposure to changes in the fair value of its AFS securities and fixed-rate loans[247] Note 13. Fair Value of Assets and Liabilities Details the fair value hierarchy for assets and liabilities, with Level 3 assets primarily in derivatives Assets Measured at Fair Value on a Recurring Basis (Sep 30, 2023, in thousands) | Category | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Investment Securities AFS | $142,059 | $2,245,265 | $0 | $2,387,324 | | Mortgage Servicing Rights | $0 | $0 | $685 | $685 | | Derivatives | $0 | $71 | $210,663 | $210,734 | | Other Assets | $51,435 | $1,450 | $0 | $52,885 | Fair Value of Financial Instruments Not on Balance Sheet (Sep 30, 2023, in thousands) | Instrument | Carrying Amount | Fair Value | | :--- | :--- | :--- | | Investment Securities HTM | $5,088,013 | $4,104,469 | | Loans | $13,651,759 | $12,416,800 | | Time Deposits | $2,659,014 | $2,627,361 | - Level 3 assets, requiring significant management judgment, include Mortgage Servicing Rights ($27.1M fair value) and Interest Rate Swap Agreements ($8.2M net fair value)[271] Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses a 9% YoY net income decline, the Maui wildfire impact, and the company's strong overall risk profile Overview and Maui Wildfires Details the company's response to the Maui wildfires, with an estimated potential loss exposure of $10.8 million - The company's business strategy focuses on balancing growth and risk management, leveraging market knowledge and brand strength[288] - In response to the Maui wildfires, the company donated $100,000 to the Maui Strong Fund and implemented emergency relief programs for affected customers[289] Maui Wildfire Loan Exposure (as of Sep 30, 2023) | Exposure Category | Amount (in millions) | | :--- | :--- | | Total Loans to Impacted Customers | $169.2 | | Loans Under Payment Deferral | $136.4 | | Estimated Potential Loss Exposure | $10.8 | Earnings Summary Q3 2023 net income fell 9% to $47.9 million due to a 15% drop in net interest income Q3 2023 vs. Q3 2022 Performance | Metric | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Net Income | $47.9M | $52.8M | -9% | | Diluted EPS | $1.17 | $1.28 | -9% | | Net Interest Income | $120.9M | $141.7M | -15% | | Provision for Credit Losses | $2.0M | $0 | +$2.0M | | Noninterest Income | $50.3M | $30.7M | +64% | - The return on average common equity was 15.38% for Q3 2023, compared to 16.98% in Q3 2022[11] - The Board of Directors declared a quarterly cash dividend of $0.70 per common share[26] - No shares of common stock were repurchased in Q3 2023, with total remaining buyback authority at $126.0 million[26] Analysis of Statements of Income Net interest income declined 15% YoY as rising funding costs outpaced growth in earning asset yields - Net interest income is analyzed through average balances, yields, and rates, with detailed tables provided for changes on a taxable-equivalent basis[12][13] Analysis of Statements of Condition Total assets remained flat at $23.5 billion, with loan growth offsetting a decline in investment securities - The carrying value of the investment securities portfolio decreased to $7.5 billion at Sep 30, 2023, from $8.3 billion at Dec 31, 2022[22] - Total loans and leases increased by $273.1 million (2%) from year-end 2022, primarily from growth in commercial and residential lending[430] - Total deposits increased by $186.6 million (1%) from year-end 2022, with a notable shift into time deposits[435] Analysis of Business Segments Consumer and Commercial Banking net income grew, while the Treasury segment reported a significant net loss Business Segment Net Income (Nine Months Ended Sep 30, in thousands) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Consumer Banking | $103,222 | $57,026 | | Commercial Banking | $98,197 | $88,576 | | Treasury and Other | ($60,613) | $18,895 | | Consolidated Total | $140,806 | $164,497 | Corporate Risk Profile The company maintains a strong risk profile with low credit risk, managed market risk, and robust liquidity - Non-Performing Assets (NPAs) decreased to $11.5 million (0.08% of loans) at Sep 30, 2023, from $12.6 million at Dec 31, 2022[352] - The total Reserve for Credit Losses stood at $151.7 million as of Sep 30, 2023, with the Allowance for Credit Losses ratio at 1.04% of total loans[343] - The company manages interest rate risk using Net Interest Income (NII) and Economic Value of Equity (EVE) sensitivity analysis, remaining within board-approved limits[360] - As of Sep 30, 2023, the company had significant contingent liquidity, including $6.1 billion in borrowing capacity from the Federal Reserve and $2.5 billion from the FHLB[391] Capital Management The company remains 'well-capitalized' with a CET1 ratio of 11.29% and all ratios exceeding regulatory minimums Regulatory Capital Ratios | Ratio | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Common Equity Tier 1 | 11.29% | 10.92% | | Tier 1 Capital | 12.53% | 12.15% | | Total Capital | 13.56% | 13.17% | | Tier 1 Leverage | 7.22% | 7.37% | - As of September 30, 2023, the Company's capital levels remained characterized as 'well-capitalized'[380] - Remaining buyback authority under the share repurchase program was $126.0 million as of September 30, 2023[383] - In October 2023, the Board declared a quarterly cash dividend of $0.70 per common share[396] Part II - Other Information Risk Factors Highlights new risks from banking sector instability, including potential adverse regulatory changes - Recent bank failures have led to decreased confidence in the banking sector, market disruption, and could adversely impact the company's stock price and volatility[415] - There is a risk of potentially adverse changes to laws or regulations, including higher capital requirements or increased FDIC premiums, which could materially impact the business[416] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased in Q3 2023, with $126.0 million remaining under the buyback authorization Issuer Purchases of Equity Securities (Q3 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Program | Remaining Authorization (USD) | | :--- | :--- | :--- | :--- | :--- | | Jul 2023 | 2,923 | $43.00 | 0 | 126,038,927 | | Aug 2023 | 0 | - | 0 | 126,038,927 | | Sep 2023 | 0 | - | 0 | 126,038,927 | | Total | 2,923 | $43.00 | 0 | 126,038,927 | Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes in the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of September 30, 2023[400] - No material changes to the Company's internal control over financial reporting occurred during the third quarter of 2023[412]