Bank Of Hawaii Corporation: Wildly Mixed Performance

Seeking Alpha
Prepared by Stephanie –


  • Q3 was a very mixed quarter.
  • Book value improved slightly while the headline numbers were crushed.
  • Asset quality remains a concern, though it is improving.
  • Net interest margin was crushed while non-interest income fell 20%.
  • Shares are overvalued.

As our followers are aware, we have provided an overview of the key metrics of a number of regional banks in the last few weeks. This is mainly because we believe that the financials offer tremendous upside in a post-COVID world. But you have to get in ahead of the herd. For the last few months, we have seen how low interest rates have weighed heavily on banks’ operational performance, and pressure on bond yields have kept these stocks down for months despite the broader averages rebounding with authority since the March lows. However, in just the last few days following the US Presidential Election as well as news of a promising COVID-19 vaccine, bond yields are moving and the outlook for banks has improved. Overall, the banks may have spiked a little too sharply, so let them pull back before you buy. That said, the financials are a sector you should be buying for the long term in our opinion.

Here is the thing. Although provisions for loan losses have spiked this year on fears of borrowers being unable pay their loans, this risk seems to be declining in the last few weeks. This feeling is especially compounded on the belief that we are going to successfully move past COVID next year. One name that we find interesting is the Bank of Hawaii Corporation (BOH). As you can imagine, this is a regional bank in the Hawaiian Islands. The bank has recently reported earnings, and with a 4% dividend yield, we like the stock, but think there are some risks that suggest you should wait for a pullback to buy.

Revenue actually declined
We saw they have good loan activity, increased deposits, and a respectable net interest margin. Overall, the bank saw revenues decline. In Q3, the company reported a top line that fell from Q3 2019. With the present quarter’s revenues of $165.9 million, the company notched a 3.2% decrease in this metric year over year. As we have noted, performance on this line has been mixed with many other regional banks having seen flat to down revenues versus last year, while others saw increases. This was one of the many that posted declines in revenues we had seen.

Earnings follow revenues lower

The decline in revenues year over year was compounded by an increase in loan loss provisions from last year and the sequential quarter. While an increased provision from last year was expected in estimates, the results were better than expected actually. Overall, the financial results for the third quarter largely reflect current conditions at the local, national and global level. The Bank of Hawaii Corporation saw net income of $37.8 million, or $0.95 per share, compared to $52.1 million, or $1.29 per share, in the same quarter of 2019. This was above expectations actually. However, it was a decline from the sequential second quarter’s $0.98 as well. While the headline performance may spook you, keep in mind the Hawaiian economy is heavily dependent on tourism and that has been ravaged. We did note that book value improved.

Book value improves but stretched valuation noted

We like to buy quality banks when they are near or below book value. This bank stock has always traded above book value, so we keep that in mind when looking at valuation. However, the valuation is certainly concerning relative to book. While momentum is so strong right now, the stock is definitely above fair value, especially now that the stock is rocketing higher. With this move, it is expensive. The bank’s stock is $72.10 which is up nicely in the last few weeks but is now way above book value. Book value per share was $33.99 at the end of Q3 2020 compared to $33.76 at the end of Q2 2020. We love to see this movement. Still, shares are expensive when we consider tangible book value per share. Most bank stocks are valued higher than tangible book value, but here we are talking more than a 100% premium. Tangible book was $33.21 at the end of Q3 2020 compared to $32.97 at the start of the quarter. Overall, we think this is really expensive. But maybe it does not matter because it has always been at a premium. Still, we would feel much better if investors waited for the price to fall back toward $60, which is still pricey, even if the stock has always been valued like this.

Movement in loans and deposits
So, with the action in the top and bottom lines, as well as the increases in book value, we need to dig further. We should understand what is going on with loans and deposits. Here is the interesting thing. Loans and deposits are up from a year ago. But as we will see, asset quality is an issue. But the reason the company saw lower headline performance was a severely pinched net interest margin, 2.67% versus 2.83% in Q2 2020, as well as non-interest income dropping 20% from Q2 as well. Still, there was positive movement in loans and deposits.

Total loans and leases were $11.8 billion at September 30, 2020. Average total loans and leases were $11.7 billion during quarter, up slightly from the previous quarter and up 9.0% from $10.8 billion during the same quarter last year. You will note the dichotomy between commercial and consumer holdings. The commercial loan portfolio was $5.0 billion at September 30, 2020, down $5.9 million or 0.1% from June 30, 2020. However, this was up $860.1 million or 20.7% from September 30, 2019. The consumer loan portfolio was $6.8 billion at September 30, 2020, down $5.9 million or 0.1% from June 30, 2020, and up $52.2 million or 0.8% from September 30, 2019.

Consumer deposits were up nicely, while commercial deposits fell sharply. Total deposits were $17.7 billion at September 30, 2020. Average total deposits were $17.3 billion during the third quarter of 2020, up 3.5% from $16.7 billion during the previous quarter and up 12.7% from $15.3 billion during the same quarter last year. Consumer deposits increased to $8.9 billion at September 30, 2020, up $136.9 million or 1.6% from $8.8 billion at June 30, 2020 and up $1.0 billion or 12.8% from $7.9 billion at September 30, 2019.

On the other hand, commercial deposits were $7.2 billion at September 30, 2020, down $135.5 million or 1.9% from $7.3 billion at June 30, 2020 but were up $1.0 billion or 16.3% from $6.2 billion at September 30, 2019. Now, increased loan activity is great, but we have to watch asset quality metrics.

Asset quality is something you should watch each quarter
The quality of the bank’s assets has eroded during the COVID crisis. However, asset quality remained relatively stable during Q3. What killed earnings was the loan loss provisions. Provisions for credit losses did improve to $28.6 million at September 30, 2020 compared with $40.4 million at June 30, 2020 and was also nearly seven times as high as $4.25 million at September 30, 2019. However, the allowance for credit losses was $203.5 million at September 30, 2020 compared with $173.4 million at June 30, 2020.

Total non-performing assets were $18.6 million at September 30, 2020, down from $22.7 million at June 30, 2020 and $21.6 million at September 30, 2019. As a percentage of total loans and leases, including foreclosed real estate, non-performing assets were 0.16%, down from 0.19% at the end of the previous quarter. We saw good movement in charge-offs. Net loan and lease charge-offs during Q3 were actually a net recovery of $1.5 million. Loan and lease charge-offs of $2.3 million during the quarter were fully offset by recoveries of $3.8 million. This was a big improvement from Q2. In Q2, we saw net charge-offs of $5.1 million or 0.18% annualized of total average loans and leases outstanding and comprised of $8.3 million in charge-offs and recoveries of $3.2 million.

Take home here
This was a wildly mixed quarter. While loans and deposits are up, asset quality is an issue, while the ability to make money has eroded thanks to rates. However, the stock has rocketed higher on the back of an improving rate outlook. We think you fade this rally unless you are looking to simply make a momentum trade. Book value improved nicely in the quarter, but shares are overvalued.

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