Business Overview
Bank of Hawaii Corporation (BOH) has a rich history as a leading financial institution in the Pacific region, serving businesses, consumers, and governments with a diverse array of products and services. Founded in 1897, the company has weathered the test of time, adapting to changing economic environments while maintaining a strong commitment to its local communities.
Bank of Hawaii's origins date back to 1897 when it was established as a bank to serve the growing commercial and agricultural needs of the Hawaiian Islands. Over the decades, the company has evolved, transitioning from a regional player to a prominent financial services provider serving the entire state of Hawaii and the wider Pacific region. In the early 2000s, the bank changed its name from Pacific Century Financial Corporation to Bank of Hawaii Corporation to better reflect its core market and focus.
A significant milestone in the company's history was its expansion into Guam and other Pacific Islands markets in the 1990s. This strategic move allowed Bank of Hawaii to leverage its local expertise and customer relationships to grow its footprint beyond Hawaii. However, this expansion presented challenges as the company had to navigate different regulatory environments and adapt its offerings to meet the needs of these new markets.
During the 2008 financial crisis, Bank of Hawaii faced significant challenges, experiencing increased loan defaults and pressure on its profitability. In response, the company strengthened its risk management practices, diversified its revenue streams, and focused on cost efficiencies to weather the economic downturn.
Today, the bank operates through its principal subsidiary, Bank of Hawaii, which offers a comprehensive suite of banking, investment, and insurance solutions. The company's operations are organized into three primary business segments: Consumer Banking, Commercial Banking, and Treasury and Other.
The Consumer Banking division caters to individuals and families, providing loan and lease financing, deposit products, brokerage, and trust services. This segment offers a broad range of financial products and services, including residential mortgage loans, home equity lines of credit, automobile loans and leases, overdraft lines of credit, installment loans, small business loans and leases, and credit cards. Deposit products include checking, savings, and time deposit accounts. Brokerage and insurance offerings encompass equities, mutual funds, life insurance, and annuity products. The private banking and trust groups assist high-net-worth individuals and families in building and preserving their wealth by providing investment, credit, and trust services. The investment management group manages portfolios utilizing a variety of investment products, and the institutional client services group offers investment advice to corporations, government entities, and foundations. Consumer Banking products and services are delivered through 50 branch locations and 317 ATMs throughout Hawaii and the Pacific Islands, a customer service center, online banking, and mobile banking.
The Commercial Banking segment serves middle-market and large companies, offering commercial and industrial loans, commercial real estate loans, commercial lease financing, auto dealer financing, merchant services, deposit products, and cash management services. The commercial real estate mortgage portfolio focuses on investors, developers, and builders predominantly domiciled in Hawaii. This segment also includes an international banking group that services Japanese, Korean, and Chinese commercial businesses.
The Treasury and Other segment manages the company's asset-liability position, interest rate risk, and foreign currency exchange activities. This segment's assets and liabilities and related interest income and expense consist of interest-bearing deposits, investment securities, federal funds sold and purchased, and short and long-term borrowings. The primary sources of noninterest income are from bank-owned life insurance, net gains from the sale of investment securities, and foreign exchange income related to customer-driven currency requests from merchants and island visitors. The net residual effect of the transfer pricing of assets and liabilities is included in Treasury and Other, along with the elimination of intercompany transactions.
Financial Performance
Bank of Hawaii has maintained a strong financial profile, weathering economic challenges and emerging as a resilient institution. As of the latest available data, the company reported total assets of $23.80 billion as of September 30, 2024. The loan and lease portfolio stood at $13.92 billion, while total deposits reached $20.98 billion.
During the third quarter of 2024, the company reported net income of $40.36 million, or $0.93 per diluted share. This compared to net income of $47.90 million, or $1.17 per diluted share, in the same period of the prior year. The decrease in net income was primarily attributed to a $3.00 million provision for credit losses, a $5.22 million decline in noninterest income, and a $1.49 million increase in noninterest expense.
Net interest income for the third quarter of 2024 was $117.62 million, a decrease of 3.00% compared to the same period in 2023. The net interest margin improved by 5 basis points to 2.18% during the quarter, driven by higher yields on earning assets and partially offset by increased deposit costs.
Noninterest income totaled $45.11 million in the third quarter of 2024, down from $50.33 million in the same period of the previous year. This decline was primarily due to lower investment securities gains and reduced customer derivative program revenue, partially offset by higher trust and asset management fees, as well as improved merchant and loan transaction volumes.
Noninterest expense increased by 1.00% to $107.09 million in the third quarter of 2024, primarily due to higher salaries and benefits, professional fees, and data processing costs, partially offset by lower occupancy and equipment expenses.
Financials
The company's capital position remained strong, with a Tier 1 capital ratio of 14.05% and a total capital ratio of 15.11% as of September 30, 2024. These ratios were well above the regulatory well-capitalized thresholds, reflecting the bank's prudent risk management and commitment to maintaining a robust capital base.
For the most recent fiscal year (2023), Bank of Hawaii reported revenue of $667.12 million, net income of $171.20 million, operating cash flow of $150.22 million, and free cash flow of $140.82 million.
In the most recent quarter (Q3 2024), the company's revenue was $162.73 million, down 5% year-over-year. Net income for the quarter was $40.40 million, a decrease of 15.8% compared to the same period in the previous year. Operating cash flow for Q3 2024 was -$19.23 million, while free cash flow was -$23.86 million.
The Consumer Banking segment contributed $32.99 million in net income for the third quarter of 2024, while the Commercial Banking segment contributed $28.93 million and the Treasury and Other segment contributed $21.56 million.
Liquidity
Bank of Hawaii's liquidity position remains solid, supported by its strong deposit base and diverse funding sources. The company's loan-to-deposit ratio stood at 66.35% as of September 30, 2024, indicating a conservative lending approach and ample liquidity to meet customer needs and potential market disruptions.
As of Q3 2024, the company's debt-to-equity ratio was 0.33, and its cash position stood at $1.27 billion. Bank of Hawaii has access to the Federal Reserve Discount Window with remaining borrowing capacity of $7.2 billion, as well as $1.9 billion in remaining borrowing capacity from the Federal Home Loan Bank of Des Moines. The current ratio and quick ratio both stood at 1.02 as of Q3 2024, further demonstrating the bank's solid liquidity position.
Geographical Footprint and Diversification
Bank of Hawaii's operations are primarily concentrated within the state of Hawaii, with the majority of its loan and deposit portfolio originating from the islands. As of September 30, 2024, approximately 92% of the company's total loans and leases were extended to borrowers located in Hawaii, Guam, and other Pacific Islands, while the remaining 8% were made to mainland U.S. customers.
This geographic focus has enabled Bank of Hawaii to leverage its deep understanding of the local market and establish strong relationships with businesses and individuals across the state. The company's emphasis on the Hawaiian economy and its diversified exposure across various industries, including tourism, real estate, and military, have contributed to its resilience and consistent financial performance.
Challenges and Risks
While Bank of Hawaii has weathered various economic cycles, the company is not without its challenges and risks. The company's performance is closely tied to the economic health of Hawaii, and any significant downturn or disruption in the local economy, such as a slowdown in the tourism industry or a decline in the real estate market, could adversely impact the bank's financial results.
Additionally, the company faces competition from larger national and regional banks, as well as emerging financial technology firms, which could put pressure on its market share and profitability. Regulatory changes, such as those introduced by the Dodd-Frank Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act, also pose potential risks and compliance challenges for the bank.
Outlook and Conclusion
Bank of Hawaii has demonstrated its ability to navigate challenging environments and maintain a strong financial position. The company's focus on serving the local community, its diversified business mix, and prudent risk management have been key drivers of its success. As the bank continues to evolve and adapt to the changing financial landscape, investors can take comfort in its long-standing history, robust capital levels, and commitment to delivering value to its stakeholders.
Based on recent guidance provided by the company, Bank of Hawaii expects net interest income and net interest margin to continue improving quarter-over-quarter. The initial 50 basis point decrease in the Federal Funds rate is anticipated to add $1.2 million to the bank's quarterly net interest income. Core non-interest income is expected to be in the range of $44-45 million in Q4 2024, reflecting improved trends from Q3. Normalized core expenses in 2024 are projected to increase by 1-1.5% from the 2023 level of $419 million. The effective tax rate for the full year of 2024 is expected to be 24.25%.
Furthermore, Bank of Hawaii's Board has declared a dividend of $0.70 per common share for Q4 2024, demonstrating the company's commitment to returning value to shareholders.
Overall, Bank of Hawaii's steady performance, diversified operations, and strong market presence in the Pacific region make it a compelling investment opportunity for those seeking exposure to a well-established financial institution with a proven track record of weathering economic cycles. The company's detailed guidance on key financial metrics indicates expectations for continued solid performance in the coming quarters, further reinforcing its position as a stable and reliable financial institution in the Pacific region.