10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K |
| | | |
(Mark One) | | | |
x | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| | For the fiscal year ended December 31, 2015 | |
| | OR | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| | for the transition period from _________ to __________ | |
Commission File Number 1-6887
BANK OF HAWAII CORPORATION
(Exact name of registrant as specified in its charter) |
| | |
Delaware (State of incorporation) | | 99-0148992 (I.R.S. Employer Identification No.) |
130 Merchant Street, Honolulu, Hawaii (Address of principal executive offices) | | 96813 (Zip Code) |
1-888-643-3888
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: |
| | |
Title of Each Class | | Name of Each Exchange on Which Registered |
Common Stock, $.01 Par Value | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. |
| | |
Large accelerated filer x | | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
The aggregate market value of the registrant's outstanding voting common stock held by non-affiliates on June 30, 2015 (the last business day of the registrant's most recently completed second fiscal quarter), determined using the per share closing price on that date on the New York Stock Exchange of $66.68, was approximately $2,840,055,498. There was no non-voting common equity of the registrant outstanding on that date.
As of February 17, 2016, there were 43,104,770 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the 2016 Annual Meeting of Shareholders to be held on April 29, 2016, are incorporated by reference into Part III of this Report.
Bank of Hawaii Corporation
2015 Form 10-K Annual Report
Table of Contents
|
| | | | | | |
| | Item Number | | | | Page |
| | | | | | |
Part I | | Item 1. | | | | |
| | Item 1A. | | | | |
| | Item 1B. | | | | |
| | Item 2. | | | | |
| | Item 3. | | | | |
| | Item 4. | | | | |
| | | | | | |
| | | | | | |
Part II | | Item 5. | | | | |
| | Item 6. | | | | |
| | Item 7. | | | | |
| | Item 7A. | | | | |
| | Item 8. | | | | |
| | Item 9. | | | | |
| | Item 9A. | | | | |
| | Item 9B. | | | | |
| | | | | | |
| | | | | | |
Part III | | Item 10. | | | | |
| | Item 11. | | | | |
| | Item 12. | | | | |
| | Item 13. | | | | |
| | Item 14. | | | | |
| | | | | | |
| | | | | | |
Part IV | | Item 15. | | | | |
Signatures | | | | | | |
Part I
Item 1. Business
General
Bank of Hawaii Corporation (the "Parent") is a Delaware corporation and a bank holding company ("BHC") headquartered in Honolulu, Hawaii. The Parent's principal operating subsidiary, Bank of Hawaii (the "Bank"), was organized on December 17, 1897 and is chartered by the State of Hawaii. The Bank's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") and the Bank is a member of the Federal Reserve System.
The Bank, directly and through its subsidiaries, provides a broad range of financial products and services primarily to customers in Hawaii, Guam, and other Pacific Islands. References to "we," "our," "us," or "the Company" refer to the Parent and its subsidiaries and are consolidated for financial reporting purposes. The Bank's subsidiaries include Bank of Hawaii Leasing, Inc., Bankoh Investment Services, Inc., and Pacific Century Life Insurance Corporation. The Bank's subsidiaries are engaged in equipment leasing, securities brokerage, investment advisory services, and providing credit insurance.
We are organized into four business segments for management reporting purposes: Retail Banking, Commercial Banking, Investment Services, and Treasury and Other. See Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") and Note 13 to the Consolidated Financial Statements for more information.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports can be found free of charge on our website at www.boh.com as soon as reasonably practicable after such material is electronically filed with or furnished to the U.S. Securities and Exchange Commission (the "SEC"). The SEC maintains a website, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our Corporate Governance Guidelines; charters of the Audit and Risk Committee, the Human Resources and Compensation Committee, and the Nominating and Corporate Governance Committee; and our Code of Business Conduct and Ethics are available on our website at www.boh.com. Printed copies of this information may be obtained, without charge, by written request to the Corporate Secretary at 130 Merchant Street, Honolulu, Hawaii, 96813.
Competition
The Company operates in a highly competitive environment subject to intense competition from traditional financial service providers including banks, savings associations, credit unions, mortgage companies, finance companies, mutual funds, brokerage firms, insurance companies, and other non-traditional providers of financial services including financial service subsidiaries of commercial and manufacturing companies. Some of our competitors are not subject to the same level of regulation and oversight that is required of banks and BHCs. As a result, some of our competitors may have lower cost structures. Also, some of our competitors, through alternative delivery channels such as the Internet, may be based outside of the markets that we serve. By emphasizing our extensive branch network, exceptional service levels, and knowledge of local trends and conditions, we believe the Company has developed an effective competitive advantage in its market.
Supervision and Regulation
Our operations are subject to extensive regulation by federal and state governmental authorities. The regulations are primarily intended to protect depositors, customers, and the integrity of the U.S. banking system and capital markets. The following information describes some of the more significant laws and regulations applicable to us. The descriptions are qualified in their entirety by reference to the applicable laws and regulations. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, in state legislatures, and with the various bank regulatory agencies. Changes in applicable laws or regulations, or a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on our business, operations, and earnings.
The Parent
The Parent is registered as a BHC under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is subject to the supervision of and to examination by the Board of Governors of the Federal Reserve Bank (the "FRB"). The Parent is also registered as a financial institution holding company under the Hawaii Code of Financial Institutions (the "Code") and is subject to the registration, reporting, and examination requirements of the Code.
The BHC Act prohibits, with certain exceptions, a BHC from acquiring beneficial ownership or control of more than 5% of the voting shares of any company, including a bank, without the FRB's prior approval. The Act also prohibits a BHC from engaging in any activity other than banking, managing or controlling banks or other subsidiaries authorized under the BHC Act, or furnishing services to or performing services for its subsidiaries.
Under FRB policy, a BHC is expected to serve as a source of financial and management strength to its subsidiary bank. A BHC is also expected to commit resources to support its subsidiary bank in circumstances where it might not do so absent such a policy. Under this policy, a BHC is expected to stand ready to provide adequate capital funds to its subsidiary bank during periods of financial adversity and to maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary bank.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act, banks and bank holding companies from any state are permitted to acquire banks located in any other state, subject to certain conditions, including certain nationwide and state-imposed deposit concentration limits. The Bank also has the ability, subject to certain restrictions, to acquire branches outside its home state by acquisition or merger. The establishment of new interstate branches is also possible in those states with laws that expressly permit de novo branching. Because the Code permits de novo branching by out-of-state banks, those banks may establish new branches in Hawaii. Interstate branches are subject to certain laws of the states in which they are located.
Bank of Hawaii
The Bank is subject to supervision and examination by the FRB of San Francisco and the State of Hawaii Department of Commerce and Consumer Affairs' ("DCCA") Division of Financial Institutions. The Bank is subject to extensive federal and state regulations that significantly affect its business and activities. These regulatory bodies have broad authority to implement standards and to initiate proceedings designed to prohibit depository institutions from engaging in activities that may represent unsafe or unsound banking practices or constitute violations of applicable laws, rules, regulations, administrative orders, or written agreements with regulators. The standards relate generally to operations and management, asset quality, interest rate exposure, capital, and executive compensation. These regulatory bodies are authorized to take action against institutions that fail to meet such standards, including the assessment of civil monetary penalties, the issuance of cease-and-desist orders, and other actions.
Bankoh Investment Services, Inc., the broker-dealer and investment advisor subsidiary of the Bank, is incorporated in Hawaii and is regulated by the SEC, the Financial Industry Regulatory Authority, and the DCCA's Business Registration Division. Pacific Century Life Insurance Corporation is incorporated in Arizona and is regulated by the State of Arizona Department of Insurance.
The Dodd Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") has broadly affected the financial services industry and significantly restructured the financial regulatory regime since its passage in July 2010. The Dodd-Frank Act and its regulations have implemented sweeping changes to the financial regulatory landscape aimed at strengthening the sound operation of the financial services sector by requiring ongoing stress testing of banks' capital, mandating higher capital and liquidity requirements, establishing new standards for mortgage lenders, increasing regulation of executive and incentive-based compensation and numerous other provisions. Additional provisions in the Dodd-Frank Act also limit or place significant burdens and costs on activities traditionally conducted by banking organizations, such as arranging and participating in swap and derivative transactions, proprietary trading and investing in private equity and other funds. All of these new rules and regulations are expected to result in increased compliance and other costs, increased legal risk and decreased product offerings.
As is discussed throughout the following sections, many aspects of the Dodd-Frank Act are subject to further rulemaking which will take effect over several years. These new rules and regulations will continue to significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions, including the Company and the Bank. Although we have already experienced some decrease in revenue as a result of the rules implemented under the Dodd-Frank Act, it remains difficult to anticipate or predict the overall financial impact the Dodd-Frank Act will continue to have on the Company, our customers, our financial condition and results of operations, or the financial industry in general.
Capital Requirements
In December 2010, the oversight body of the Basel Committee on Banking Supervision finalized a set of international guidelines for determining regulatory capital known as “Basel III,” which includes reforms regarding capital, leverage, and liquidity. In July 2013, the FRB, the Office of the Comptroller of the Currency (the "OCC") and the FDIC finalized rules to implement the Basel III capital rules in the United States. These comprehensive rules are designed to help ensure that banks maintain strong capital positions by increasing both the quantity and quality of capital held by U.S. banking organizations. The final rules became effective for the Company on January 1, 2015. The final rules also include a new capital conservation buffer, which will be phased in beginning January 1, 2016 and will increase annually until fully phased-in by January 1, 2019. See the “Regulatory Initiatives Affecting the Banking Industry” section in MD&A for more information on Basel III.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions. FDICIA identifies five capital categories for insured depository institutions: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Under regulations established by the federal banking agencies, upon implementing the Basel III capital guidelines, a "well capitalized" institution must have a Common Equity Tier 1 Capital Ratio of at least 6.5%, a Tier 1 Capital Ratio of at least 8%, a Total Capital Ratio of at least 10%, a Tier 1 Leverage Ratio of at least 5%, and not be subject to a capital directive order. As of December 31, 2015, the Bank was classified as "well capitalized." The classification of a depository institution under FDICIA is primarily for the purpose of applying the federal banking agencies' prompt corrective action provisions, and is not intended to be, nor should it be interpreted as, a representation of the overall financial condition or the prospects of that financial institution. See Note 11 to the Consolidated Financial Statements for more information.
As part of implementing the provisions of the Dodd-Frank Act, in October 2012, the FRB published final rules requiring banks with total consolidated assets of more than $10.0 billion to conduct and publish annual stress tests. In March 2014, the FRB, OCC, and FDIC issued final supervisory guidance for these stress tests. Compliance with these requirements began in October 2013. See the “Regulatory Initiatives Affecting the Banking Industry” section in MD&A for more information on stress testing.
Dividend Restrictions
The Parent is a legal entity separate and distinct from the Bank. The Parent's principal source of funds to pay dividends on its common stock and to service its debt is dividends from the Bank. Various federal and state laws and regulations limit the amount of dividends the Bank may pay to the Parent without regulatory approval. The FRB is authorized to determine the circumstances when the payment of dividends would be an unsafe or unsound practice and to prohibit such payments. The right of the Parent, its shareholders, and creditors, to participate in any distribution of the assets or earnings of its subsidiaries is also subject to the prior claims of creditors of those subsidiaries. For information regarding the limitations on the Bank's ability to pay dividends to the Parent, see Note 11 to the Consolidated Financial Statements.
Transactions with Affiliates and Insiders
Under federal law, the Bank is subject to restrictions that limit the transfer of funds or other items of value to the Parent, and any other non-bank affiliates in so-called "covered transactions." In general, covered transactions include loans, leases, other extensions of credit, investments and asset purchases, as well as other transactions involving the transfer of value from the Bank to an affiliate or for the benefit of an affiliate. The Dodd-Frank Act broadened the definition of affiliate, and the definition of covered transaction to include securities borrowing/lending, repurchase/reverse repurchase agreements, and derivative transactions that the Bank may have with an affiliate. The Dodd-Frank Act also strengthened the collateral requirements and limited FRB exemptive authority.
Unless an exemption applies, covered transactions by the Bank with a single affiliate are limited to 10% of the Bank's capital and surplus, and with respect to all covered transactions with affiliates in the aggregate, they are limited to 20% of the Bank's capital and surplus.
The Federal Reserve Act also requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other non-affiliated persons. The FRB has issued Regulation W which codifies the above restrictions on transactions with affiliates.
The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to as "insiders") contained in the Federal Reserve Act and Regulation O apply to all insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such loans can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution's total unimpaired capital and surplus. The definition of "extension of credit" for transactions with executive officers, directors, and principal shareholders was also expanded under the Dodd-Frank Act to include credit exposure arising from derivative transactions, repurchase or reverse repurchase agreements, and securities lending or borrowing transactions.
Volcker Rule
On December 10, 2013, the final “Volcker Rule” under the Dodd-Frank Act was approved by the FRB, the OCC, the FDIC, the SEC, and the Commodities Futures Trading Commission. The Volcker Rule prohibits U.S. banks from engaging in proprietary trading and restricts those banking entities from sponsoring, investing in, or having certain relationships with hedge funds and private equity funds. The final rule may limit or restrict the Company’s activities related to proprietary trading and private equity investing. In connection with the issuance of the regulations, the FRB exercised its authority to extend the conformance period for compliance with the Volcker Rule by one year from July 21, 2014 to July 21, 2015. During the remaining conformance period, each banking entity is expected to engage in good faith efforts that will result in conformance of all its activities and investments with the requirements of the Volcker Rule by July 21, 2015. On December 18, 2014, the FRB issued an order extending, for an additional year to July 21, 2016, the Volcker Rule conformance period for banking entities to conform their investments in and relationships with covered funds subject to the Volcker Rule that were in place prior to December 31, 2013. No extension was granted for the conformance period for proprietary trading which expired on July 21, 2015. The Company does not anticipate that the Volcker Rule will have a material impact on the Company’s Consolidated Financial Statements, but continues to evaluate its application to our current and future operations.
FDIC Insurance
The FDIC provides insurance coverage for certain deposits through the Deposit Insurance Fund (the "DIF"), which the FDIC maintains by assessing depository institutions an insurance premium. Pursuant to the Dodd-Frank Act, the amount of deposit insurance coverage for deposits increased permanently from $100,000 to $250,000, per depositor, for each account ownership category. The Company pays deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC.
Our FDIC insurance assessment was $8.7 million in 2015, $7.9 million in 2014, and $7.8 million in 2013.
Effective January 1, 2015, the FDIC modified certain elements of its deposit insurance assessment system for insured depository institutions. The FDIC revised its methodology for determining insurance assessment rates, and the ratios and ratio thresholds for “well-capitalized,” “adequately capitalized,” and “undercapitalized" evaluation categories used in its risk-based deposit insurance assessment system to conform to the prompt corrective action capital ratio thresholds adopted as part of the U.S, Basel III capital rules.
Other Safety and Soundness Regulations
As required by FDICIA, the federal banking agencies' prompt corrective action powers impose progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. These actions can include: requiring an insured depository institution to adopt a capital restoration plan guaranteed by the institution's parent company; placing limits on asset growth and restrictions on activities, including restrictions on transactions with affiliates; restricting the interest rates the institution may pay on deposits; prohibiting the payment of principal or interest on subordinated debt; prohibiting the holding company from making capital distributions without prior regulatory approval; and, ultimately, appointing a receiver for the institution.
The federal banking agencies also have adopted guidelines prescribing safety and soundness standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation and benefits. The federal regulatory agencies may take action against a financial institution that does not meet such standards.
Depositor Preference
The FDIC provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for
administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the United States and the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
Community Reinvestment and Consumer Protection Laws
In connection with its lending activities, the Bank is subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Community Reinvestment Act (the "CRA"). In addition, federal banking regulators, pursuant to the Gramm-Leach-Bliley Act, have enacted regulations limiting the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated third parties.
The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the communities served by the bank, including low and moderate income neighborhoods.
Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The Bank received an "outstanding" rating in its most recent CRA evaluation.
The Company is subject to a number of federal and state consumer protection laws that extensively govern its relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict the Company's ability to raise interest rates and subject the Company to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state attorney general and civil money penalties. Failure to comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for transactions the Company may wish to pursue or our prohibition from engaging in such transactions even if approval is not required.
The Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”) as an agency responsible for promulgating regulations designed to protect consumers including implementing, examining and enforcing compliance with federal consumer financial laws. The Dodd-Frank Act adds prohibitions on unfair, deceptive and abusive acts and practices to the scope of consumer protection regulations overseen and enforced by the CFPB. The CFPB, along with other prudential regulators and the Department of Justice, have also expanded the focus of their regulatory examinations and investigations to include “fair and responsible banking.” Fair and responsible banking strives to provide equal credit opportunities to all applicants of a community, to prohibit discrimination by lenders on the basis of certain borrower characteristics, and to ensure that a bank’s practices are not deceptive, unfair, or take unreasonable advantage of consumers or businesses when offering retail financial services. The focus also has been expanded to encompass the entire loan life cycle, including post-closing activities such as collections and servicing, and pre-application activities such as marketing and loan solicitation and origination. Fair and responsible banking is intended to ensure that banks provide fair and equitable access to the entire spectrum of financial products and services, including credit cards, student and auto lending, to all consumers and businesses in the marketplaces they serve, and strive to be clear and transparent in all communications with customers, treating them fairly in all circumstances.
Some of the rules and regulations under the Dodd-Frank Act have not yet been implemented. Accordingly, it remains difficult to predict the ultimate impact the Dodd-Frank Act will have on our financial condition or results of operations.
Bank Secrecy Act / Anti-Money Laundering Laws
The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001. The USA PATRIOT Act substantially broadened the scope of U.S. anti-money laundering laws and regulations by creating new laws, regulations, and penalties, imposing significant new compliance and due diligence obligations, and expanding the application of those laws outside the U.S. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report potential money laundering and terrorist financing and to verify the identity of its customers. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing bank mergers and BHC acquisitions.
Employees
As of December 31, 2015, we had approximately 2,200 employees.
Executive Officers of the Registrant
Listed below are executive officers of the Parent as of December 31, 2015.
Peter S. Ho, 50
Chairman and Chief Executive Officer since July 2010 and President since April 2008; Vice Chairman and Chief Banking Officer from January 2006 to April 2008.
Kent T. Lucien, 62
Vice Chairman and Chief Financial Officer since April 2008; Trustee, C. Brewer & Co., Ltd. from April 2006 to December 2007.
Peter M. Biggs, 64
Vice Chairman since February 2011 and Chief Retail Officer since April 2012; Senior Executive Vice President, Consumer Products Division from March 2006 to February 2011.
Sharon M. Crofts, 50
Vice Chairman of Operations and Technology since October 2012; Senior Executive Vice President of Operations from May 2008 to October 2012; Executive Vice President and Chief Compliance Officer from December 2005 to May 2008.
Wayne Y. Hamano, 61
Vice Chairman since December 2008 and Chief Commercial Officer since September 2007 and oversees the Commercial Banking and Investment Services Groups; Senior Executive Vice President, Hawaii Commercial Banking Division from July 2006 to September 2007.
Mark A. Rossi, 66
Vice Chairman, Chief Administrative Officer, General Counsel, and Corporate Secretary since February 2007; President of Lane Powell PC from July 2004 to January 2007.
Mary E. Sellers, 59
Vice Chairman and Chief Risk Officer since July 2005.
Donna A. Tanoue, 61
Vice Chairman, Client Relations and Community Activities since February 2007; President of the Bank of Hawaii Foundation since April 2006.
Derek J. Norris, 66
Vice Chairman, Residential and Consumer Lending, since August 2014; Senior Executive Vice President and Controller since December 2009; Executive Vice President and Controller since December 2008; Executive Vice President and General Auditor from January 2002 to December 2008.
Dean Y. Shigemura, 52
Senior Executive Vice President and Controller since August 2014; Senior Executive Vice President and Treasurer since May 2008.
Item 1A. Risk Factors
There are a number of risks and uncertainties that could negatively affect our business, financial condition or results of operations. We are subject to various risks resulting from changing economic, environmental, political, industry, business, financial and regulatory conditions. The risks and uncertainties described below are some of the important inherent risk factors that could affect our business and operations, although they are not the only risks that may have a material adverse effect on the Company.
Changes in business and economic conditions, in particular those of Hawaii, Guam and other Pacific Islands, could lead to lower revenue, lower asset quality, and lower earnings.
Unlike larger national or other regional banks that are more geographically diversified, our business and earnings are closely tied to the economies of Hawaii and the Pacific Islands. These local economies rely heavily on tourism, the U.S. military, real estate, construction, government, and other service-based industries. Lower visitor arrivals or spending, real or threatened acts of war or terrorism, increases in energy costs, the availability of affordable air transportation, climate change, natural disasters and adverse weather, public health issues including Asian air pollution, and Federal, State of Hawaii and County budget issues may impact consumer and corporate spending. As a result, such events may contribute to a significant deterioration in general economic conditions in our markets which could adversely impact us and our customers' operations.
General economic conditions in Hawaii remained healthy in 2015, led by a strong tourism industry, relatively low unemployment, rising real estate prices, and an active construction industry. However, deterioration of economic conditions, either locally or nationally, could adversely affect the quality of our assets, credit losses, and the demand for our products and services, which could lead to lower revenues and lower earnings. The level of visitor arrivals and spending, housing prices, and unemployment rates are some of the metrics that we continually monitor. We also monitor the value of collateral, such as real estate, that secures the loans we have made. The borrowing power of our customers could also be negatively impacted by a decline in the value of collateral.
Changes in defense spending by the federal government as a result of congressional budget cuts could adversely impact the economy in Hawaii and the Pacific Islands.
The U.S. military has a major presence in Hawaii and the Pacific Islands. As a result, the U.S. military is an important aspect of the economies in which we operate. The funding of the U.S. military is subject to the overall U.S. Government budget and appropriation decisions and processes which are driven by numerous factors, including geo-political events, macroeconomic conditions, and the ability and willingness of the U.S. Government to enact legislation. U.S. Government appropriations have been and likely will continue to be affected by larger U.S. Government budgetary issues and related legislation. Cuts in defense and other security spending could have an adverse impact on the economies in which we operate, which could adversely affect our business, financial condition, and results of operations.
Changes in interest rates could adversely impact our results of operations and capital.
Our earnings are highly dependent on the spread between the interest earned on loans, leases, and investment securities and the interest paid on deposits and borrowings. Changes in market interest rates impact the rates earned on loans, leases, and investment securities and the rates paid on deposits and borrowings. In addition, changes to market interest rates could impact the level of loans, leases, investment securities, deposits, and borrowings, and the credit profile of our current borrowers. Interest rates are affected by many factors beyond our control, and fluctuate in response to general economic conditions, currency fluctuations, and the monetary and fiscal policies of various governmental and regulatory authorities. Changes in monetary policy, including changes in interest rates, will influence the origination of loans and leases, the purchase of investments, the generation of deposits, and the rates received on loans and investment securities and paid on deposits. Any substantial prolonged change in market interest rates may negatively impact our ability to attract deposits, originate loans and leases, and achieve satisfactory interest rate spreads, any of which could adversely affect our financial condition or results of operations.
Credit losses could increase if economic conditions stagnate or deteriorate.
Although economic conditions are currently healthy nationally and in Hawaii, increased credit losses for us could result if economic conditions stagnate or deteriorate. The risk of nonpayment on loans and leases is inherent in all lending activities. We maintain a reserve for credit losses to absorb estimated probable credit losses inherent in the loan, lease, and commitment portfolios as of the balance sheet date. Management makes various assumptions and judgments about the loan and lease portfolio in determining the level of the reserve for credit losses. Many of these assumptions are based on current economic conditions.
Should economic conditions stagnate or deteriorate nationally or in Hawaii, we may experience higher credit losses in future periods.
Inability of our borrowers to make timely repayments on their loans, or decreases in real estate collateral values may result in increased delinquencies, foreclosures, and customer bankruptcies, any of which could have a material adverse effect on our financial condition or results of operations.
Legislation and regulatory initiatives affecting the financial services industry, including new restrictions and requirements, could detrimentally affect the Company's business.
In light of the financial crisis which began in 2008, regulators have increased their focus on the regulation of financial institutions. Laws and regulations, and in particular banking and securities laws, are under intense scrutiny. The Dodd-Frank Act, enacted in July 2010, triggered sweeping reforms to the financial services industry. Although many of the rules and regulations implementing the Dodd-Frank Act have already gone into effect, some of the rules required to be implemented under the Dodd-Frank Act have yet to be implemented and will require further interpretation and rulemaking by federal regulators. We are closely monitoring all relevant sections of the Dodd-Frank Act in our efforts to comply with these new laws and regulations. While the ultimate effect of the Dodd-Frank Act on us cannot currently be determined, the law and its implementing rules and regulations have resulted and are likely to continue to result in increased compliance costs and fees, along with possible restrictions on our operations, any of which may have a material adverse effect on our operating results and financial condition.
The CFPB has begun to exercise its broad rule-making, supervisory, and examination authority of consumer financial products, as well as expanded data collection and enforcement powers, over depository institutions with more than $10.0 billion in assets. The CFPB has recently focused its rulemaking in several areas, particularly in the area of mortgage reform involving the Real Estate Settlement Procedures Act (Reg X), the Truth-in-Lending Act (Reg Z), the Equal Credit Opportunity Act (Reg B), and the Fair Debt Collection Practices Act. On January 10, 2014, the CFPB issued a number of new rules impacting residential mortgage lending practices. As a result of greater regulatory scrutiny of consumer financial products, the Company has become subject to more and expanded regulatory examinations and/or investigations, which also could result in increased costs and harm to our reputation in the event of a failure to comply with the increased regulatory requirements. All of these rules have created challenges for product and service offerings, operations and compliance programs for the Company.
Regulation of overall safety and soundness, the CRA, federal housing and flood insurance, as they pertain to consumer financial products and services, remain with the FRB. Many of the rules and regulations of the CFPB have not been implemented, and therefore, the scope and impact of the CFPB's actions cannot be determined at this time. This creates significant uncertainty for us and for the financial services industry in general.
These new laws, regulations, and changes may continue to increase our costs of regulatory compliance. They may significantly affect the markets in which we do business, the markets for and value of our investments, and our ongoing operations, costs, and profitability. The future impact of the many provisions of the Dodd-Frank Act and other legislative and regulatory initiatives on the Company's business and results of operations will depend upon regulatory interpretation and rulemaking that still must be undertaken. As a result, we are unable to predict the ultimate impact of the Dodd-Frank Act or of other future legislation or regulation, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition, and results of operations.
Changes in the capital, leverage, liquidity requirements and the introduction of stress testing requirements for financial institutions could materially affect future requirements of the Company.
Under Basel III, financial institutions are required to have more capital and a higher quality of capital. Under the final rules issued by the banking regulators, minimum requirements increased for both the quantity and quality of capital held by the Company. The phase-in period for the final rules began for the Company on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule.
On October 9, 2012, the FRB published final rules implementing the stress testing requirements for banks, such as the Company, with total consolidated assets of more than $10.0 billion but less than $50.0 billion. The final stress testing rules set forth the timing and type of stress test activities, as well as rules governing controls, oversight and disclosure.
Compliance with Basel III and the results of our stress testing may result in increased capital, liquidity, and disclosure requirements. See the "Regulatory Initiatives Affecting the Banking Industry" section in MD&A for more information.
Consumer protection initiatives related to the foreclosure process could affect our remedies as a creditor.
Proposed consumer protection initiatives related to the foreclosure process, including voluntary and/or mandatory programs intended to permit or require lenders to consider loan modifications or other alternatives to foreclosure, could increase our credit losses or increase our expense in pursuing our remedies as a creditor.
In recent years, Hawaii overhauled its rules for nonjudicial, or out-of-court, foreclosures. Previously, nonjudicial foreclosures were how most lenders handled foreclosures in Hawaii, as the process was quicker and less expensive than going through court. The revised rules had the unintended effect of many lenders forgoing nonjudicial foreclosures entirely and filing all foreclosures in court, creating a backlog that has slowed the judicial foreclosure process. Although some of the backlog has been cleared, many lenders continue to use the judicial foreclosure process exclusively, making the foreclosure process very lengthy. There is discussion about further changes to the foreclosure laws in Hawaii, with the potential to create further delays for new and existing cases. In addition, the joint federal-state settlement with several mortgage servicers over foreclosure practice abuses creates additional uncertainty for the Company and the mortgage servicing industry in general as it relates to the implementation of mortgage loan modifications and loss mitigation practices in the future. The manner in which these issues are ultimately resolved could impact our foreclosure procedures, which in turn could affect our financial condition or results of operations.
Competition may adversely affect our business.
Our future depends on our ability to compete effectively. We compete for deposits, loans, leases, and other financial services with a variety of competitors, including banks, thrifts, savings associations, credit unions, mortgage companies, finance companies, mutual funds, brokerage firms, insurance companies, and other non-traditional providers of financial services, including financial service subsidiaries of commercial and manufacturing companies, all of which may be based in or outside of Hawaii and the Pacific Islands. We expect competitive conditions to intensify as consolidation in the financial services industry continues. The financial services industry is also likely to become more competitive as further technological advances enable more companies, including non-depository institutions, to provide financial services. Some of our competitors are not subject to the same level of regulation and oversight that is required of banks and BHCs. As a result, some of our competitors may have lower cost structures. Also, some of our competitors, through alternative delivery channels such as the Internet, may be based outside of the markets that we serve. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act, banks and bank holding companies from any state are permitted to acquire banks located in any other state, subject to certain conditions, including certain nationwide and state-imposed deposit concentration limits. Because the Code permits de novo branching by out-of-state banks, those banks may establish new branches in Hawaii. Interstate branches are subject to certain laws of the states in which they are located. Failure to effectively compete, innovate, and to make effective use of available channels to deliver our products and services could adversely affect our financial condition or results of operations.
The Parent's liquidity is dependent on dividends from the Bank.
The Parent is a separate and distinct legal entity from the Bank. The Parent receives substantially all of its cash in the form of dividends from the Bank. These dividends are the principal source of funds to pay, for example, dividends on the Parent's common stock or to repurchase common stock under the Parent's share repurchase program. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Parent. If the amount of dividends paid by the Bank is further limited, the Parent's ability to meet its obligations, pay dividends to shareholders, or repurchase stock, may be further limited as well.
A failure in or breach of our operational systems, information systems, or infrastructure, or those of our third party vendors and other service providers, may result in financial losses, loss of customers, or damage to our reputation.
We rely heavily on communications and information systems to conduct our business. In addition, we rely on third parties to provide key components of our infrastructure, including loan, deposit and general ledger processing, internet connections, and network access. These types of information and related systems are critical to the operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to the operations of certain of our customers. These third parties with which we do business or that facilitate our business activities, including exchanges, clearing firms, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including breakdowns or failures of their own systems or capacity constraints. Although we have safeguards and business continuity plans in place, our business operations may be adversely affected by significant and
widespread disruption to our physical infrastructure or operating systems that support our business and our customers, resulting in financial losses, loss of customers, or damage to our reputation.
An interruption or breach in security of our information systems or those related to merchants and third party vendors, including as a result of cyber attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, or result in financial losses.
Our technologies, systems, networks and software, and those of other financial institutions have been, and are likely to continue to be, the target of cybersecurity threats and attacks, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us. These cybersecurity threats and attacks may include, but are not limited to, attempts to access information, including customer and company information, malicious code, computer viruses and denial of service attacks that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service or other events. These types of threats may result from human error, fraud or malice on the part of external or internal parties, or from accidental technological failure. Further, to access our products and services our customers may use computers and mobile devices that are beyond our security control systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.
Our business requires the collection and retention of large volumes of customer data, including credit card numbers and other personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal company data such as personally identifiable information about our employees and information relating to our operations. The integrity and protection of that customer and company data is important to us. As customer, public, legislative and regulatory expectations regarding operational and information security have increased, our operations systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns.
Our customers and employees have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, credit card numbers, bank account information or other personal information or to introduce viruses or other malware through "trojan horse" programs to our customers' computers. These communications may appear to be legitimate messages sent by the Bank or other businesses, but direct recipients to fake websites operated by the sender of the e-mail or request that the recipient send a password or other confidential information via e-mail or download a program. Despite our efforts to mitigate these threats through product improvements, use of encryption and authentication technology to secure online transmission of confidential consumer information, and customer and employee education, such attempted frauds against us or our merchants and our third party service providers remain a serious issue. The pervasiveness of cyber security incidents in general and the risks of cyber crime are complex and continue to evolve. In light of several recent high-profile retail data breaches involving customer personal and financial information, we believe the potential impact on the Company and any exposure to consumer losses and the cost of technology investments to improve security could cause customer and/or Bank losses, damage to our brand, and increase our costs.
Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well-protected information, networks, systems and facilities remain potentially vulnerable because attempted security breaches, particularly cyber attacks and intrusions, or disruptions will occur in the future, and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely mitigate this risk. A security breach or other significant disruption could: 1) disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our customers; 2) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers, including account numbers and other financial information; 3) result in a violation of applicable privacy, data breach and other laws, subjecting the Bank to additional regulatory scrutiny and exposing the Bank to civil litigation, governmental fines and possible financial liability; 4) require significant management attention and resources to remedy the damages that result; or 5) harm our reputation or cause a decrease in the number of customers that choose to do business with us or reduce the level of business that our customers do with us. The occurrence of any such failures, disruptions or security breaches could have a negative impact on our results of operations, financial condition, and cash flows as well as damage our brand and reputation.
Negative public opinion could damage our reputation and adversely impact our earnings and liquidity.
Reputational risk, or the risk to our business, earnings, liquidity, and capital from negative public opinion could result from our actual or alleged conduct in a variety of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, ethical issues, or inadequate protection of customer information. We expend significant resources to comply with regulatory requirements. Failure to comply could result in reputational harm or significant legal or remedial costs. Damage to our reputation could adversely affect our ability to retain and attract new customers, and adversely impact our earnings and liquidity.
We are subject to certain litigation, and our expenses related to this litigation may adversely affect our results.
We are, from time to time, involved in various legal proceedings arising from our normal business activities. These claims and legal actions, including supervisory actions by our regulators, could involve large monetary claims and significant defense costs. The outcome of these cases is uncertain. Substantial legal liability or significant regulatory action against us could have material financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects. We may be exposed to substantial uninsured liabilities, which could materially affect our results of operations and financial condition. Based on information currently available, we believe that the eventual outcome of known actions against us will not be materially in excess of such amounts accrued by us. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters may be material to our financial results for any particular period.
Changes in income tax laws or interpretations or in accounting standards could materially affect our financial condition or results of operations.
Changes in income tax laws could be enacted, or interpretations of existing income tax laws could change, causing an adverse effect on our financial condition or results of operations. Similarly, our accounting policies and methods are fundamental to how we report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the value of our assets, liabilities, and financial results. Periodically, new accounting standards are issued or existing standards are revised, changing the methods for preparing our financial statements. These changes are not within our control and may significantly impact our financial condition and results of operations.
Our performance depends on attracting and retaining key employees and skilled personnel to operate our business effectively.
Our success is dependent on our ability to recruit qualified and skilled personnel to operate our business effectively. Competition for these qualified and skilled people is intense. There are a limited number of qualified personnel in the markets we serve, so our success depends in part on the continued services of many of our current management and other key employees. Failure to retain our key employees and maintain adequate staffing of qualified personnel could adversely impact our operations and our ability to compete.
The soundness of other financial institutions, as counterparties, may adversely impact our financial condition or results of operations.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, lending, counterparty, or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions or the financial services industry in general have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. We have exposure to many different industries and counterparties, and we routinely execute transactions with brokers and dealers, commercial banks, investment banks, mutual funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. Such losses could materially affect our financial condition or results of operations.
Changes in the capital markets could materially affect the level of assets under management and the demand for our other fee-based services.
Changes in the capital markets could affect the volume of income from and demand for our fee-based services. Our investment management revenues depend in large part on the level of assets under management. Market volatility that leads customers to
liquidate investments, move investments to other institutions or asset classes, as well as lower asset values can reduce our level of assets under management and thereby decrease our investment management revenues.
Our mortgage banking income may experience significant volatility.
Our mortgage banking income is highly influenced by the level and direction of mortgage interest rates, real estate activity, and refinancing activity. Interest rates can affect the amount of mortgage banking activity and impact fee income and the fair value of our derivative financial instruments and mortgage servicing rights. Mortgage banking income may also be impacted by changes in our strategy to manage our residential mortgage portfolio. For example, we may occasionally decide to add more conforming saleable loans to our portfolio (as opposed to selling the loans in the secondary market) which would reduce our gains on sales of residential mortgage loans. These variables could adversely affect mortgage banking income.
The requirement to record certain assets and liabilities at fair value may adversely affect our financial results.
We report certain assets, including available-for-sale investment securities, at fair value. Generally, for assets that are reported at fair value we use quoted market prices or valuation models that utilize market data inputs to estimate fair value. Because we record these assets at their estimated fair value, we may incur losses even if the asset in question presents minimal credit risk. The level of interest rates can impact the estimated fair value of investment securities. Disruptions in the capital markets may require us to recognize other-than-temporary impairments in future periods with respect to investment securities in our portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of our investment securities and our estimation of the anticipated recovery period.
There can be no assurance that the Parent will continue to declare cash dividends or repurchase stock.
During 2015, the Parent repurchased 802,255 shares of common stock at a total cost of $50.2 million under its share repurchase program. The Parent also paid cash dividends of $78.4 million during 2015. In January 2016, the Parent's Board of Directors declared a quarterly cash dividend of $0.45 per share on the Parent's outstanding shares. In addition, from January 1, 2016 through February 17, 2016, the Parent repurchased an additional 149,500 shares of common stock at an average cost of $59.50 per share and a total cost of $8.9 million.
Whether we continue, and the amount and timing of, such dividends and/or stock repurchases is subject to capital availability and periodic determinations by our Board of Directors that cash dividends and/or stock repurchases are in the best interest of our shareholders. We continue to evaluate the potential impact that regulatory proposals may have on our liquidity and capital management strategies, including Basel III and those required under the Dodd-Frank Act. The actual amount and timing of future dividends and share repurchases, if any, will depend on market and economic conditions, applicable SEC rules, federal and state regulatory restrictions, and various other factors. In addition, the amount we spend and the number of shares we are able to repurchase under our stock repurchase program may further be affected by a number of other factors, including the stock price and blackout periods in which we are restricted from repurchasing shares. Our dividend payments and/or stock repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends and/or repurchase stock in any particular amounts or at all. A reduction in or elimination of our dividend payments and/or stock repurchases could have a negative effect on our stock price.
Natural disasters and adverse weather could negatively affect real estate property and bank operations.
Real estate and real estate property values play an important role for the Bank in several ways. The Bank owns many real estate properties, primarily located in Hawaii. Real estate is also utilized as collateral for many of our loans. A natural disaster could cause property values to fall, which could require the Bank to record an impairment on its financial statements. A natural disaster could also impact collateral values, which would increase our exposure to loan defaults. Our business operations could also suffer to the extent the Bank cannot utilize its branch network due to weather-related damage.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal offices are located in the Financial Plaza of the Pacific in Honolulu, Hawaii. We own and lease other branch offices and operating facilities located throughout Hawaii and the Pacific Islands. Additional information with respect to premises and equipment is presented in Notes 6 and 20 to the Consolidated Financial Statements.
Item 3. Legal Proceedings
We are from time to time subject to lawsuits, investigations and claims arising out of the conduct of our business. Management believes that the ultimate resolution of these matters is not likely to materially affect our financial position and results of operations. For additional information, see Note 20 to the Consolidated Financial Statements, under the discussion related to Contingencies.
Item 4. Mine Safety Disclosures
Not Applicable.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information, Shareholders, and Dividends
Information regarding the historical market prices of the Parent's common stock, book value, and dividends declared on that stock are shown below.
Market Prices, Book Values, and Common Stock Dividends Per Share
|
| | | | | | | | | | | | | | | | | | | | |
| | Market Price Range | Book Value | | Dividends Declared | |
Year/Period | High | | Low | | Close | |
2015 | | $ | 70.07 |
| | $ | 53.90 |
| | $ | 62.90 |
| | $ | 25.79 |
| | $ | 1.80 |
|
First Quarter | | 62.58 |
| | 53.90 |
| | 61.21 |
| | | | 0.45 |
|
Second Quarter | | 68.10 |
| | 58.70 |
| | 66.68 |
| | | | 0.45 |
|
Third Quarter | | 69.00 |
| | 58.53 |
| | 63.49 |
| | | | 0.45 |
|
Fourth Quarter | | 70.07 |
| | 60.55 |
| | 62.90 |
| | | | 0.45 |
|
| | | | | | | | | | |
2014 | | $ | 61.73 |
| | $ | 52.70 |
| | $ | 59.31 |
| | $ | 24.13 |
| | $ | 1.80 |
|
First Quarter | | 61.36 |
| | 54.16 |
| | 60.61 |
| | | | 0.45 |
|
Second Quarter | | 61.73 |
| | 53.45 |
| | 58.69 |
| | | | 0.45 |
|
Third Quarter | | 60.75 |
| | 55.55 |
| | 56.81 |
| | | | 0.45 |
|
Fourth Quarter | | 61.00 |
| | 52.70 |
| | 59.31 |
| | | | 0.45 |
|
The common stock of the Parent is traded on the New York Stock Exchange (NYSE Symbol: BOH) and quoted daily in leading financial publications. As of February 17, 2016, there were 6,271 common shareholders of record.
The Parent's Board of Directors considers on a quarterly basis the feasibility of paying a cash dividend to its shareholders and the level and feasibility of repurchasing shares of the Parent's common stock. Under the Parent's historical practice, dividends declared are paid within the quarter. See "Dividend Restrictions" under "Supervision and Regulation" in Item 1 of this report and Note 11 to the Consolidated Financial Statements for more information.
Issuer Purchases of Equity Securities
|
| | | | | | | | | | | | |
Period | | Total Number of Shares Purchased 1 | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs 2 | |
October 1 - 31, 2015 | | 79,473 | | $ | 64.77 |
| | 79,000 | | $ | 31,830,801 |
|
November 1 - 30, 2015 | | 46,377 | | 67.64 |
| | 45,000 | | 28,785,315 |
|
December 1 - 31, 2015 | | 90,000 | | 64.05 |
| | 90,000 | | 23,020,820 |
|
Total | | 215,850 | | $ | 65.09 |
| | 214,000 | | |
1 During the fourth quarter of 2015, 1,850 shares were purchased from employees and/or directors in connection with income tax withholdings related to the vesting of restricted stock and shares purchased for a deferred compensation plan. These shares were not purchased as part of the publicly announced program. The shares were purchased at the closing price of the Parent's common stock on the dates of purchase.
2 The share repurchase program was first announced in July 2001. The program has no set expiration or termination date.
Performance Graph
The following graph shows the cumulative total return for the Parent's common stock compared to the cumulative total returns for the Standard & Poor's ("S&P") 500 Index and the S&P Banks Index. The graph assumes that $100 was invested on December 31, 2010 in the Parent's common stock, the S&P 500 Index, and the S&P Banks Index. The cumulative total return on each investment is as of December 31 of each of the subsequent five years and assumes reinvestment of dividends.
|
| | | | | | |
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 |
Bank of Hawaii Corporation | $100 | $98 | $101 | $140 | $145 | $159 |
S&P 500 Index | $100 | $102 | $118 | $157 | $178 | $181 |
S&P Banks Index | $100 | $74 | $102 | $138 | $157 | $158 |
Item 6. Selected Financial Data
Summary of Selected Consolidated Financial Data
|
| | | | | | | | | | | | | | | | | | | | | |
(dollars in millions, except per share amounts) | | 2015 |
| | 2014 |
| | 2013 |
| | 2012 |
| | 2011 |
| |
Year Ended December 31, | | | | | | | | | | | |
Operating Results | | | | | | | | | | | |
Net Interest Income | | $ | 394.1 |
| | $ | 379.7 |
| | $ | 358.9 |
| | $ | 377.3 |
| | $ | 390.2 |
| |
Provision for Credit Losses | | 1.0 |
| | (4.9 | ) | | — |
| | 1.0 |
| | 12.7 |
| |
Total Noninterest Income | | 186.2 |
| | 180.0 |
| | 186.2 |
| | 200.3 |
| | 197.7 |
| |
Total Noninterest Expense | | 348.1 |
| | 326.9 |
| | 331.0 |
| | 334.3 |
| | 348.2 |
| |
Net Income | | 160.7 |
| | 163.0 |
| | 150.5 |
| | 166.1 |
| | 160.0 |
| |
Basic Earnings Per Share | | 3.72 |
| | 3.71 |
| | 3.39 |
| | 3.68 |
| | 3.40 |
| |
Diluted Earnings Per Share | | 3.70 |
| | 3.69 |
| | 3.38 |
| | 3.67 |
| | 3.39 |
| |
Dividends Declared Per Share | | 1.80 |
| | 1.80 |
| | 1.80 |
| | 1.80 |
| | 1.80 |
| |
| | | | | | | | | | | |
Performance Ratios | | | | | | | | | | | |
Net Income to Average Total Assets (ROA) | | 1.06 |
| % | 1.14 |
| % | 1.10 |
| % | 1.22 |
| % | 1.22 |
| % |
Net Income to Average Shareholders' Equity (ROE) | | 14.82 |
| | 15.50 |
| | 14.78 |
| | 16.23 |
| | 15.69 |
| |
Efficiency Ratio 1 | | 59.99 |
| | 58.41 |
| | 60.71 |
| | 57.88 |
| | 59.23 |
| |
Net Interest Margin 2 | | 2.81 |
| | 2.85 |
| | 2.81 |
| | 2.97 |
| | 3.13 |
| |
Dividend Payout Ratio 3 | | 48.39 |
| | 48.52 |
| | 53.10 |
| | 48.91 |
| | 52.94 |
| |
Average Shareholders' Equity to Average Assets | | 7.16 |
| | 7.35 |
| | 7.44 |
| | 7.52 |
| | 7.78 |
| |
| | | | | | | | | | | |
Average Balances | | | | | | | | | | | |
Average Loans and Leases | | $ | 7,423.6 |
| | $ | 6,405.4 |
| | $ | 5,883.7 |
| | $ | 5,680.3 |
| | $ | 5,349.9 |
| |
Average Assets | | 15,136.5 |
| | 14,317.5 |
| | 13,692.1 |
| | 13,609.2 |
| | 13,105.0 |
| |
Average Deposits | | 12,925.2 |
| | 12,122.1 |
| | 11,396.8 |
| | 10,935.0 |
| | 9,924.7 |
| |
Average Shareholders' Equity | | 1,084.1 |
| | 1,052.2 |
| | 1,018.3 |
| | 1,023.3 |
| | 1,020.1 |
| |
| | | | | | | | | | | |
Weighted Average Shares Outstanding | | | | | | | | | | | |
Basic Weighted Average Shares | | 43,217,818 |
| | 43,899,208 |
| | 44,380,948 |
| | 45,115,441 |
| | 47,064,925 |
| |
Diluted Weighted Average Shares | | 43,454,877 |
| | 44,125,456 |
| | 44,572,725 |
| | 45,249,300 |
| | 47,224,981 |
| |
| | | | | | | | | | | |
As of December 31, | | | | | | | | | | | |
Balance Sheet Totals | | | | | | | | | | | |
Loans and Leases | | $ | 7,879.0 |
| | $ | 6,897.6 |
| | $ | 6,095.4 |
| | $ | 5,854.5 |
| | $ | 5,538.3 |
| |
Total Assets | | 15,455.0 |
| | 14,787.2 |
| | 14,084.3 |
| | 13,728.4 |
| | 13,846.4 |
| |
Total Deposits | | 13,251.1 |
| | 12,633.1 |
| | 11,914.7 |
| | 11,529.5 |
| | 10,592.6 |
| |
Other Debt | | 245.8 |
| | 173.9 |
| | 174.7 |
| | 128.1 |
| | 30.7 |
| |
Total Shareholders' Equity | | 1,116.3 |
| | 1,055.1 |
| | 1,012.0 |
| | 1,021.7 |
| | 1,002.7 |
| |
| | | | | | | | | | | |
Asset Quality | | | | | | | | | | | |
Allowance for Loan and Lease Losses | | $ | 102.9 |
| | $ | 108.7 |
| | $ | 115.5 |
| | $ | 128.9 |
| | $ | 138.6 |
| |
Non-Performing Assets | | 28.8 |
| | 30.1 |
| | 39.7 |
| | 37.1 |
| | 40.8 |
| |
| | | | | | | | | | | |
Financial Ratios | | | | | | | | | | | |
Allowance to Loans and Leases Outstanding | | 1.31 |
| % | 1.58 |
| % | 1.89 |
| % | 2.20 |
| % | 2.50 |
| % |
Tier 1 Capital Ratio 4 | | 13.97 |
| | 14.69 |
| | 16.05 |
| | 17.18 |
| | 17.90 |
| |
Total Capital Ratio 4 | | 15.22 |
| | 15.94 |
| | 17.31 |
| | 18.45 |
| | 19.17 |
| |
Tier 1 Leverage Ratio 4 | | 7.26 |
| | 7.13 |
| | 7.24 |
| | 7.25 |
| | 7.20 |
| |
Total Shareholders' Equity to Total Assets | | 7.22 |
| | 7.14 |
| | 7.19 |
| | 7.44 |
| | 7.24 |
| |
Tangible Common Equity to Tangible Assets 5 | | 7.03 |
| | 6.94 |
| | 6.98 |
| | 7.23 |
| | 7.03 |
| |
Tangible Common Equity to Risk-Weighted Assets 4, 5 | | 13.62 |
| | 14.46 |
| | 15.67 |
| | 17.46 |
| | 18.17 |
| |
| | | | | | | | | | | |
Non-Financial Data | | | | | | | | | | | |
Full-Time Equivalent Employees | | 2,164 |
| | 2,161 |
| | 2,196 |
| | 2,276 |
| | 2,370 |
| |
Branches and Offices | | 70 |
| | 74 |
| | 74 |
| | 76 |
| | 81 |
| |
ATMs | | 456 |
| | 459 |
| | 466 |
| | 494 |
| | 506 |
| |
Common Shareholders of Record | | 6,279 |
| | 6,421 |
| | 6,564 |
| | 6,775 |
| | 6,977 |
| |
| |
1 | Efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income). |
| |
2 | Net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earning assets. |
| |
3 | Dividend payout ratio is defined as dividends declared per share divided by basic earnings per share. |
| |
4 | December 31, 2015 calculated under Basel III rules, which became effective January 1, 2015. |
| |
5 | Tangible common equity to tangible assets and tangible common equity to risk-weighted assets are Non-GAAP financial measures. See the "Use of Non-GAAP Financial Measures" section below. |
Use of Non-GAAP Financial Measures
The ratios “tangible common equity to tangible assets” and “tangible common equity to risk-weighted assets” are Non-GAAP financial measures. The Company believes these measurements are useful for investors, regulators, management and others to evaluate capital adequacy relative to other financial institutions. Although these Non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. The following table provides a reconciliation of these Non-GAAP financial measures with their most closely related GAAP measures.
GAAP to Non-GAAP Reconciliation
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
(dollars in thousands) | | 2015 |
| | 2014 |
| | 2013 |
| | 2012 |
| | 2011 |
|
Total Shareholders' Equity | | $ | 1,116,260 |
| | $ | 1,055,086 |
| | $ | 1,011,976 |
| | $ | 1,021,665 |
| | $ | 1,002,667 |
|
Less: Goodwill | | 31,517 |
| | 31,517 |
| | 31,517 |
| | 31,517 |
| | 31,517 |
|
Intangible Assets | | — |
| | — |
| | — |
| | 33 |
| | 83 |
|
Tangible Common Equity | | $ | 1,084,743 |
| | $ | 1,023,569 |
| | $ | 980,459 |
| | $ | 990,115 |
| | $ | 971,067 |
|
| | | | | | | | | | |
Total Assets | | $ | 15,455,016 |
| | $ | 14,787,208 |
| | $ | 14,084,280 |
| | $ | 13,728,372 |
| | $ | 13,846,391 |
|
Less: Goodwill | | 31,517 |
| | 31,517 |
| | 31,517 |
| | 31,517 |
| | 31,517 |
|
Intangible Assets | | — |
| | — |
| | — |
| | 33 |
| | 83 |
|
Tangible Assets | | $ | 15,423,499 |
| | $ | 14,755,691 |
| | $ | 14,052,763 |
| | $ | 13,696,822 |
| | $ | 13,814,791 |
|
Risk-Weighted Assets, determined in accordance with prescribed regulatory requirements 1 | | $ | 7,962,484 |
| | $ | 7,077,035 |
| | $ | 6,258,143 |
| | $ | 5,671,774 |
| | $ | 5,345,740 |
|
| | | | | | | | | | |
Total Shareholders' Equity to Total Assets | | 7.22 | % | | 7.14 | % | | 7.19 | % | | 7.44 | % | | 7.24 | % |
Tangible Common Equity to Tangible Assets (Non-GAAP) | | 7.03 | % | | 6.94 | % | | 6.98 | % | | 7.23 | % | | 7.03 | % |
| | | | | | | | | | |
Tier 1 Capital Ratio 1 | | 13.97 | % | | 14.69 | % | | 16.05 | % | | 17.18 | % | | 17.90 | % |
Tangible Common Equity to Risk-Weighted Assets (Non-GAAP) 1 | | 13.62 | % | | 14.46 | % | | 15.67 | % | | 17.46 | % | | 18.17 | % |
1 December 31, 2015 calculated under Basel III rules, which became effective January 1, 2015.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include statements concerning, among other things, the anticipated economic and business environment in our service area and elsewhere, credit quality and other financial and business matters in future periods, our future results of operations and financial position, our business strategy and plans and our objectives and future operations. We also may make forward-looking statements in our other documents filed or furnished with the Securities and Exchange Commission. In addition, our senior management may make forward-looking statements orally to analysts, investors, representatives of the media and others. Our forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate and actual results may differ materially from those projected because of a variety of risks and uncertainties, including, but not limited to: 1) general economic conditions either nationally, internationally, or locally may be different than expected, and particularly, any event that negatively impacts the tourism industry in Hawaii; 2) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and internationally; 3) competitive pressures in the markets for financial services and products; 4) the impact of legislative and regulatory initiatives, particularly the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"); 5) changes in fiscal and monetary policies of the markets in which we operate; 6) the increased cost of maintaining or the Company's ability to maintain adequate liquidity and capital, based on the requirements adopted by the Basel Committee on Banking Supervision and U.S. regulators; 7) actual or alleged conduct which could harm our reputation; 8) changes in accounting standards; 9) changes in tax laws or regulations or the interpretation of such laws and regulations; 10) changes in our credit quality or risk profile that may increase or decrease the required level of our reserve for credit losses; 11) changes in market interest rates that may affect credit markets and our ability to maintain our net interest margin; 12) the impact of litigation and regulatory investigations of the Company, including costs, expenses, settlements, and judgments; 13) any failure in or breach of our operational systems, information systems or infrastructure, or those of our merchants, third party vendors and other service providers; 14) any interruption or breach of security of our information systems resulting in failures or disruptions in customer account management, general ledger processing, and loan or deposit systems; 15) changes to the amount and timing of proposed common stock repurchases; and 16) natural disasters, public unrest or adverse weather, public health, and other conditions impacting us and our customers' operations. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included under the section entitled "Risk Factors" in Part I of this report. Words such as "believes," "anticipates," "expects," "intends," "targeted," and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements. We undertake no obligation to update forward-looking statements to reflect later events or circumstances, except as may be required by law.
Critical Accounting Policies
Our Consolidated Financial Statements were prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and follow general practices within the industries in which we operate. The most significant accounting policies we follow are presented in Note 1 to the Consolidated Financial Statements. Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements. These factors include among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are those that are related to the determination of the reserve for credit losses, fair value estimates, leased asset residual values, and income taxes.
Reserve for Credit Losses
A consequence of lending activities is that we may incur credit losses. The amount of such losses will vary depending upon the risk characteristics of the loan and lease portfolio as affected by economic conditions such as rising interest rates and the financial performance of borrowers. The reserve for credit losses consists of the allowance for loan and lease losses (the "Allowance") and a reserve for unfunded commitments (the "Unfunded Reserve"). The Allowance provides for probable and estimable losses
inherent in our loan and lease portfolio. The Allowance is increased or decreased through the provisioning process. There is no exact method of predicting specific losses or amounts that ultimately may be charged-off on particular segments of the loan and lease portfolio. The Unfunded Reserve is a component of other liabilities and represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. The level of the Unfunded Reserve is adjusted by recording an expense or recovery in other noninterest expense.
Management's evaluation of the adequacy of the reserve for credit losses is often the most critical of accounting estimates for a financial institution. Our determination of the amount of the reserve for credit losses is a critical accounting estimate as it requires significant reliance on the accuracy of credit risk ratings on individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on impaired loans, significant reliance on estimated loss rates on homogenous portfolios, and consideration of our quantitative and qualitative evaluation of economic factors and trends. While our methodology in establishing the reserve for credit losses attributes portions of the Allowance and Unfunded Reserve to the commercial and consumer portfolio segments, the entire Allowance and Unfunded Reserve is available to absorb credit losses inherent in the total loan and lease portfolio and total amount of unfunded credit commitments, respectively.
The reserve for credit losses related to our commercial portfolio segment is generally most sensitive to the accuracy of credit risk ratings assigned to each borrower. Commercial loan risk ratings are evaluated based on each situation by experienced senior credit officers and are subject to periodic review by an independent internal team of credit specialists. The reserve for credit losses related to our consumer portfolio segment is generally most sensitive to economic assumptions and delinquency trends. The reserve for credit losses attributable to each portfolio segment also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors include, but are not limited to, concentrations of credit risk (geographic, large borrower, and industry), economic trends and conditions, changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of criticized and classified loans.
See Note 4 to the Consolidated Financial Statements and the "Corporate Risk Profile – Credit Risk" section in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for more information on the Allowance and the Unfunded Reserve.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are traded actively and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value. However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate fair value. In developing our fair value measurements, we maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value hierarchy defines Level 1 valuations as those based on quoted prices, unadjusted, for identical instruments traded in active markets. Level 2 valuations are those based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 valuations are based on model-based techniques that use at least one significant assumption not observable in the market, or significant management judgment or estimation, some of which may be internally developed.
Financial assets that are recorded at fair value on a recurring basis include available-for-sale investment securities, loans held for sale, mortgage servicing rights, investments related to deferred compensation arrangements, and derivative financial instruments. As of December 31, 2015 and 2014, $2.3 billion or 15% and $2.3 billion or 16%, respectively, of our total assets consisted of financial assets recorded at fair value on a recurring basis and most of these financial assets consisted of available-for-sale investment securities measured using information from a third-party pricing service. These investments in debt securities and mortgage-backed securities were all classified in either Levels 1 or 2 of the fair value hierarchy. Financial liabilities that are recorded at fair value on a recurring basis are comprised of derivative financial instruments. As of December 31, 2015 and 2014, $13.6 million and $16.8 million, respectively, or less than 1% of our total liabilities consisted of financial liabilities recorded at fair value on a recurring basis. As of December 31, 2015 and 2014, Level 3 financial assets recorded at fair value on a recurring basis were $15.8 million and $19.0 million, respectively, or less than 1% of our total assets, and were comprised of mortgage servicing rights and derivative financial instruments. As of December 31, 2015 and 2014, Level 3 financial liabilities recorded at
fair value on a recurring basis were $13.6 million and $16.3 million, respectively, or less than 1% of our total liabilities, and were comprised of derivative financial instruments.
Our third-party pricing service makes no representations or warranties that the pricing data provided to us is complete or free from errors, omissions, or defects. As a result, we have processes in place to monitor and periodically review the information provided to us by our third-party pricing service such as: 1) Our third-party pricing service provides us with documentation by asset class of inputs and methodologies used to value securities. We review this documentation to evaluate the inputs and valuation methodologies used to place securities into the appropriate level of the fair value hierarchy. This documentation is periodically updated by our third-party pricing service. Accordingly, transfers of securities within the fair value hierarchy are made if deemed necessary. 2) On a quarterly basis, management reviews the pricing information received from our third-party pricing service. This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by our third-party pricing service. We also identify investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of trades relative to historic levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. As of December 31, 2015 and 2014, management did not make adjustments to prices provided by our third-party pricing service as a result of illiquid or inactive markets. 3) On a quarterly basis, management also selects a sample of securities priced by the Company's third-party pricing service and reviews the significant assumptions and valuation methodologies used by the pricing service with respect to those securities. Based on this review, management determines whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted. 4) On an annual basis, to the extent available, we obtain and review independent auditor's reports from our third-party pricing service related to controls placed in operation and tests of operating effectiveness. We did not note any significant control deficiencies in our review of the independent auditor's reports related to services rendered by our third-party pricing service. 5) Our third-party pricing service has also established processes for us to submit inquiries regarding quoted prices. Periodically, we will challenge the quoted prices provided by our third-party pricing service. Our third-party pricing service will review the inputs to the evaluation in light of the new market data presented by us. Our third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis.
Based on the composition of our investment securities portfolio, we believe that we have developed appropriate internal controls and performed appropriate due diligence procedures to prevent or detect material misstatements. See Note 21 to the Consolidated Financial Statements for more information on our fair value measurements.
Leased Asset Residual Values
Lease financing receivables include a residual value component, which represents the estimated value of leased assets upon lease expiration. Our determination of residual value is derived from a variety of sources, including equipment valuation services, appraisals, and publicly available market data on recent sales transactions for similar equipment. The length of time until lease termination, the cyclical nature of equipment values, and the limited marketplace for re-sale of certain leased assets, are important variables considered in making this determination. We update our valuation analysis on an annual basis, or more frequently as warranted by events or circumstances. When we determine that the fair value is lower than the expected residual value at lease expiration, the difference is recognized as an asset impairment in the period in which the analysis is completed.
Income Taxes
We determine our liabilities for income taxes based on current tax regulation and interpretations in tax jurisdictions where our income is subject to taxation. Currently, we file tax returns in seven federal, state and local domestic jurisdictions, and four foreign jurisdictions. In estimating income taxes payable or receivable, we assess the relative merits and risks of the appropriate tax treatment considering statutory, judicial, and regulatory guidance in the context of each tax position. Accordingly, previously estimated liabilities are regularly reevaluated and adjusted through the provision for income taxes. Changes in the estimate of income taxes payable or receivable occur periodically due to changes in tax rates, interpretations of tax law, the status of examinations being conducted by various taxing authorities, and newly enacted statutory, judicial and regulatory guidance that impact the relative merits and risks of each tax position. These changes, when they occur, may affect the provision for income taxes as well as current and deferred income taxes, and may be significant to our statements of income and condition.
Management's determination of the realization of net deferred tax assets is based upon management's judgment of various future events and uncertainties, including the timing and amount of future income, as well as the implementation of various tax planning strategies to maximize realization of the deferred tax assets. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. As of December 31, 2015 and 2014, we carried a valuation
allowance of $3.9 million and $4.7 million, respectively, related to our deferred tax assets established in connection with our low-income housing investments.
We are also required to record a liability, referred to as an unrecognized tax benefit ("UTB"), for the entire amount of benefit taken in a prior or future income tax return when we determine that a tax position has a less than 50% likelihood of being accepted by the taxing authority. As of December 31, 2015 and 2014, our liabilities for UTBs were $11.6 million and $12.2 million, respectively. See Note 16 to the Consolidated Financial Statements for more information on income taxes.
In 2015, the Company recognized federal and State of Hawaii investment tax credits from energy investments. The Company uses the deferral method of accounting for its investment tax credit with the benefit recognized in the provision for income taxes. These credits reduced the Company's provision for income taxes by $3.5 million in 2015.
Overview
We are a regional financial services company serving businesses, consumers, and governments in Hawaii, Guam, and other Pacific Islands. Our principal operating subsidiary, the Bank, was founded in 1897 and is the largest independent financial institution in Hawaii.
Our business strategy is to use our unique market knowledge, prudent management discipline and brand strength to deliver exceptional value to our stakeholders. Our business plan is balanced between growth and risk management while maintaining flexibility to adjust to economic changes. We will continue to focus on providing customers with best in class service and an innovative mix of products and services. We will also remain focused on continuing to deliver strong financial results while maintaining prudent risk and capital management strategies as well as our commitment to support our local communities.
Hawaii Economy
General economic conditions in Hawaii remained healthy during 2015, led by a strong tourism industry, relatively low unemployment, rising real estate prices, and an active construction industry. Total visitor arrivals increased 4.1% and visitor spending increased 2.3% during 2015 compared to 2014. The statewide seasonally-adjusted unemployment rate was 3.2% in December 2015 compared to 5.0% nationally. The volume of single-family home sales on Oahu increased 5.2% in 2015 compared to 2014, while the volume of condominium sales on Oahu increased 4.5% in 2015 compared to 2014. The median price of single-family home sales and condominium sales on Oahu increased 3.7% and 2.9%, respectively, in 2015 compared to 2014. As of December 31, 2015, months of inventory of single-family homes and condominiums on Oahu remained low at approximately 2.6 months and 2.9 months, respectively.
Oahu’s industrial property vacancy rate reached a new historic low of 1.7% at year-end 2015 compared to 2.1% a year earlier. Industrial space listings concurrently fell to their lowest level in nine years at 163 versus 199 a year ago. Oahu’s retail vacancy rate increased to 5.1% in 2015 from 4.1% in 2014 primarily due to a major expansion of a Honolulu shopping center which contributed approximately 650,000 square feet in additional space to the market in late 2015, of which approximately 400,000 square feet was leased in 2015. Oahu’s office market vacancy rate declined to 12.7% at year-end 2015 compared to 13.2% a year earlier reflecting net absorption of 37,935 square feet of office space.
Earnings Summary
Net income for 2015 was $160.7 million, a decrease of $2.3 million or 1% compared to 2014. Diluted earnings per share were $3.70 in 2015, an increase of $0.01 or less than 1% compared to 2014. Our return on average assets was 1.06% in 2015, a decrease of 8 basis points from 2014, and our return on average shareholders' equity was 14.82% in 2015, a decrease of 68 basis points from 2014.
Our lower net income in 2015 was primarily due to the following:
| |
• | Other noninterest expense was $71.0 million in 2015, an increase of $15.6 million or 28% compared to 2014. This increase was primarily due to a $9.5 million impairment charge recorded in the third quarter of 2015 on six aircraft which were previously on lease agreements. Insurance expense increased by $2.2 million primarily due to a reserve reduction in the fourth quarter of 2014. In addition, we increased our investment in solar energy tax credit partnerships, which caused the related amortization expense to increase from $1.2 million in 2014 to $2.4 million in 2015. However, the federal and state tax benefits related to these partnership investments totaled $3.3 million in 2015, resulting in a $0.9 million net benefit to overall net income. The tax benefits are recorded as a reduction to income tax expense. |
| |
• | Salaries and benefits expense was $192.0 million in 2015, an increase of $8.9 million or 5% compared to 2014 due in part to a $2.9 million increase in separation expense. Commission expense increased by $1.7 million primarily due to an increase in both loan origination and refinance activity. In addition, share-based compensation and incentive compensation increased by $1.6 million and $1.2 million, respectively. |
| |
• | We recorded a $1.0 million provision for credit losses in 2015 compared to a $4.9 million negative provision recorded in 2014. The negative provision in 2014 reflected the strength of our credit risk profile, several large commercial loan recoveries in 2014, combined with a reduction in the specific reserve related to one commercial client during the third quarter of 2014. |
These items were partially offset by the following:
| |
• | Net interest income was $394.1 million in 2015, an increase of $14.4 million or 4% compared to 2014. This increase was primarily due to a higher level of earning assets. Average earning assets increased by $771.0 million in 2015 compared to 2014. Earning assets increased primarily due to increased deposits. Deposits grew by $618.0 million in 2015 compared to 2014. Our net interest margin was 2.81% in 2015, a decrease of 4 basis points compared to 2014. The lower margin in 2015 was primarily due to lower yields in our investment securities and loans, reflective of the continued low interest rate environment. |
| |
• | Net occupancy expense was $30.2 million in 2015, a decrease of $7.1 million or 19% compared to 2014. This decrease was primarily due to a $4.1 million gain on the sale of a Honolulu branch property in the fourth quarter of 2015 and a $1.7 million gain on the sale of two real estate properties in Guam in the third quarter of 2015. |
| |
• | Mortgage banking income was $11.6 million in 2015, an increase of $4.0 million or 53% compared to 2014. This increase was primarily due to our decision to sell more conforming saleable loans from current production and our mortgage loan portfolio, which generated gains on sales of residential mortgage loans. |
| |
• | Net gains on sales of investment securities totaled $10.2 million in 2015 primarily due to a $10.1 million gain on the sale of 95,000 Visa Class B restricted shares during the first quarter of 2015. Net gains on sales of investment securities totaled $8.1 million in 2014 primarily due to a $7.9 million gain on the sale of 90,500 Visa Class B restricted shares. We also contributed to the Bank of Hawaii Foundation 13,800 and 21,600 Visa Class B shares during 2015 and 2014, respectively. These contributions had no impact on noninterest expense; however, these contributions favorably impacted our effective tax rate. |
We maintained a strong balance sheet throughout 2015, with adequate reserves for credit losses, and high levels of liquidity and capital.
| |
• | Total loans and leases were $7.9 billion as of December 31, 2015, an increase of $981.4 million or 14% from December 31, 2014 primarily due to growth in both our commercial and consumer lending portfolios. |
| |
• | The allowance for loan and lease losses (the "Allowance") was $102.9 million as of December 31, 2015, a decrease of $5.8 million or 5% from December 31, 2014. The ratio of our Allowance to total loans and leases outstanding decreased to 1.31% as of December 31, 2015, compared to 1.58% as of December 31, 2014. This decrease was commensurate with the Company's credit risk profile, loan portfolio growth and composition, and a healthy Hawaii economy. |
| |
• | The total carrying value of our investment securities portfolio was $6.2 billion as of December 31, 2015, a decrease of $516.3 million or 8% from December 31, 2014. In 2015, we continued to reduce our positions in mortgage-backed securities issued by Ginnie Mae. We re-invested these proceeds primarily into higher-yielding loan products. In addition, we increased our holdings in Fannie Mae and Freddie Mac mortgage-backed securities as well as Small Business Administration debt securities. |
| |
• | Total deposits were $13.3 billion as of December 31, 2015, an increase of $618.0 million or 5% from December 31, 2014 primarily due to higher commercial and consumer core deposits. |
| |
• | Total shareholders' equity was $1.1 billion as of December 31, 2015, an increase of $61.2 million or 6% from December 31, 2014. We continued to return capital to our shareholders in the form of share repurchases and dividends. During 2015, we repurchased 843,959 shares of common stock at a total cost of $53.0 million under our share repurchase program and from employees and/or directors in connection with income tax withholdings related to the vesting of restricted stock, shares purchased for a deferred compensation plan, and stock swaps, less shares distributed from the deferred compensation plan. We also paid cash dividends of $78.4 million during 2015. |
Analysis of Statements of Income
Average balances, related income and expenses, and resulting yields and rates are presented in Table 1. An analysis of the change in net interest income, on a taxable-equivalent basis, is presented in Table 2.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Average Balances and Interest Rates – Taxable-Equivalent Basis | | | | | | Table 1 |
| | 2015 | | 2014 | | 2013 | |
(dollars in millions) | | Average Balance |
| | Income/ Expense |
| | Yield/ Rate | | Average Balance |
| | Income/ Expense |
| | Yield/ Rate | | Average Balance |
| | Income/ Expense |
| | Yield/ Rate | |
Earning Assets | | | | | | | | | | | | | | | | | | | |
Interest-Bearing Deposits in Other Banks | | $ | 3.4 |
| | $ | — |
| | 0.22 | % | $ | 4.3 |
| | $ | — |
| | 0.21 | % | $ | 4.0 |
| | $ | — |
| | 0.26 | % |
Funds Sold | | 483.1 |
| | 1.1 |
| | 0.23 | | 316.2 |
| | 0.7 |
| | 0.21 | | 221.2 |
| | 0.4 |
| | 0.19 | |
Investment Securities | | | | | | | | | | | | | | | | | | | |
Available-for-Sale | | | | | | | | | | | | | | | | | | | |
Taxable | | 1,554.2 |
| | 26.6 |
| | 1.71 | | 1,536.5 |
| | 27.7 |
| | 1.80 | | 2,138.3 |
| | 38.7 |
| | 1.81 | |
Non-Taxable | | 721.7 |
| | 22.9 |
| | 3.18 | | 699.6 |
| | 22.7 |
| | 3.24 | | 684.2 |
| | 22.9 |
| | 3.35 | |
Held-to-Maturity | | | | | | | | | | | | | | | | | | | |
Taxable | | 3,981.2 |
| | 83.3 |
| | 2.09 | | 4,412.5 |
| | 99.4 |
| | 2.25 | | 3,955.8 |
| | 86.7 |
| | 2.19 | |
Non-Taxable | | 247.8 |
| | 9.8 |
| | 3.93 | | 251.3 |
| | 10.0 |
| | 3.95 | | 130.8 |
| | 5.1 |
| | 3.94 | |
Total Investment Securities | | 6,504.9 |
| | 142.6 |
| | 2.19 | | 6,899.9 |
| | 159.8 |
| | 2.32 | | 6,909.1 |
| | 153.4 |
| | 2.22 | |
Loans Held for Sale | | 8.7 |
| | 0.3 |
| | 3.83 | | 3.2 |
| | 0.1 |
| | 4.31 | | 16.4 |
| | 0.7 |
| | 4.18 | |
Loans and Leases 1 | | | | | | | | | | | | | | | | | | | |
Commercial and Industrial | | 1,152.3 |
| | 36.6 |
| | 3.18 | | 970.3 |
| | 33.3 |
| | 3.43 | | 865.8 |
| | 30.9 |
| | 3.57 | |
Commercial Mortgage | | 1,543.5 |
| | 58.5 |
| | 3.79 | | 1,331.5 |
| | 52.5 |
| | 3.94 | | 1,152.9 |
| | 46.9 |
| | 4.06 | |
Construction | | 123.9 |
| | 5.9 |
| | 4.79 | | 109.4 |
| | 4.8 |
| | 4.40 | | 114.6 |
| | 5.4 |
| | 4.75 | |
Commercial Lease Financing | | 217.8 |
| | 7.5 |
| | 3.46 | | 237.6 |
| | 7.0 |
| | 2.96 | | 261.6 |
| | 6.0 |
| | 2.31 | |
Residential Mortgage | | 2,774.7 |
| | 113.9 |
| | 4.10 | | 2,377.9 |
| | 101.6 |
| | 4.27 | | 2,275.8 |
| | 101.7 |
| | 4.47 | |
Home Equity | | 944.0 |
| | 34.2 |
| | 3.63 | | 815.6 |
| | 31.9 |
| | 3.91 | | 761.5 |
| | 31.4 |
| | 4.12 | |
Automobile | | 352.3 |
| | 18.4 |
| | 5.21 | | 288.8 |
| | 15.4 |
| | 5.32 | | 232.3 |
| | 12.7 |
| | 5.48 | |
Other 2 | | 315.1 |
| | 23.7 |
| | 7.51 | | 274.3 |
| | 20.8 |
| | 7.58 | | 219.2 |
| | 18.0 |
| | 8.21 | |
Total Loans and Leases | | 7,423.6 |
| | 298.7 |
| | 4.02 | | 6,405.4 |
| | 267.3 |
| | 4.17 | | 5,883.7 |
| | 253.0 |
| | 4.30 | |
Other | | 49.0 |
| | 1.3 |
| | 2.67 | | 72.7 |
| | 1.2 |
| | 1.66 | | 78.3 |
| | 1.2 |
| | 1.50 | |
Total Earning Assets 3 | | 14,472.7 |
| | 444.0 |
| | 3.07 | | 13,701.7 |
|
| 429.1 |
| | 3.13 | | 13,112.7 |
|
| 408.7 |
| | 3.12 | |
Cash and Due from Banks | | 130.0 |
| | | | | | 143.4 |
| | | | | | 138.9 |
| | | | | |
Other Assets | | 533.8 |
| | | | | | 472.4 |
| | | | | | 440.5 |
| | | | | |
Total Assets | | $ | 15,136.5 |
| | | | | | $ | 14,317.5 |
| | | | | | $ | 13,692.1 |
| | | | | |
| | | | | | | | | | | | | | | | | | | |
Interest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | |
Interest-Bearing Deposits | | | | | | | | | | | | | | | | | | | |
Demand | | $ | 2,616.4 |
| | $ | 0.8 |
| | 0.03 | % | $ | 2,390.8 |
| | $ | 0.7 |
| | 0.03 | % | $ | 2,140.5 |
| | $ | 0.6 |
| | 0.03 | % |
Savings | | 5,015.6 |
| | 4.4 |
| | 0.09 | | 4,592.6 |
| | 3.9 |
| | 0.09 | | 4,461.4 |
| | 3.9 |
| | 0.09 | |
Time | | 1,252.9 |
| | 4.4 |
| | 0.35 | | 1,450.3 |
| | 4.9 |
| | 0.34 | | 1,406.2 |
| | 5.6 |
| | 0.40 | |
Total Interest-Bearing Deposits | | 8,884.9 |
| | 9.6 |
| | 0.11 | | 8,433.7 |
| | 9.5 |
| | 0.11 | | 8,008.1 |
| | 10.1 |
| | 0.13 | |
Short-Term Borrowings | | 8.4 |
| | — |
| | 0.15 | | 9.3 |
| | — |
| | 0.14 | | 31.7 |
| | — |
| | 0.15 | |
Securities Sold Under Agreements to Repurchase | | 655.9 |
| | 25.4 |
| | 3.87 | | 747.9 |
| | 25.9 |
| | 3.46 | | 809.4 |
| | 26.9 |
| | 3.32 | |
Other Debt | | 219.7 |
| | 3.0 |
| | 1.37 | | 174.4 |
| | 2.6 |
| | 1.45 | | 171.0 |
| | 2.6 |
| | 1.50 | |
Total Interest-Bearing Liabilities | | 9,768.9 |
| | 38.0 |
| | 0.39 | | 9,365.3 |
| | 38.0 |
| | 0.41 | | 9,020.2 |
| | 39.6 |
| | 0.44 | |
Net Interest Income | | | | $ | 406.0 |
| | | | | | $ | 391.1 |
| | | | | | $ | 369.1 |
| | | |
Interest Rate Spread | | | | | | 2.68 | % | | | | | 2.72 | % | | | | | 2.68 | % |
Net Interest Margin | | | | | | 2.81 | % | | | | | 2.85 | % | | | | | 2.81 | % |
Noninterest-Bearing Demand Deposits | | 4,040.3 |
| | | | | | 3,688.4 |
| | | | | | 3,388.7 |
| | | | | |
Other Liabilities | | 243.2 |
| | | | | | 211.6 |
| | | | | | 264.9 |
| | | | | |
Shareholders' Equity | | 1,084.1 |
| | | | | | 1,052.2 |
| | | | | | 1,018.3 |
| | | | | |
Total Liabilities and Shareholders' Equity | | $ | 15,136.5 |
| | | | | | $ | 14,317.5 |
| | | | | | $ | 13,692.1 |
| | | | | |
| |
1 | Non-performing loans and leases are included in the respective average loan and lease balances. Income, if any, on such loans and leases is recognized on a cash basis. |
| |
2 | Comprised of other consumer revolving credit, installment, and consumer lease financing. |
| |
3 | Interest income includes taxable-equivalent basis adjustments, based upon a federal statutory tax rate of 35%, of $ 11.9 million for 2015, $11.5 million for 2014, and $10.2 million for 2013. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Analysis of Change in Net Interest Income – Taxable-Equivalent Basis | | | | Table 2 | |
| | Year Ended December 31, 2015 Compared to 2014 | | Year Ended December 31, 2014 Compared to 2013 |
(dollars in millions) | | Volume 1 |
| | Rate 1 |
| | Total |
| | Volume 1 |
| | Rate 1 |
| | Total |
|
Change in Interest Income: | | | | | | | | | | | | |
Funds Sold | | $ | 0.3 |
| | $ | 0.1 |
| | $ | 0.4 |
| | $ | 0.2 |
| | $ | 0.1 |
| | $ | 0.3 |
|
Investment Securities | | | | | | | | | | | | |
Available-for-Sale | | | | | | | | | | | | |
Taxable | | 0.3 |
| | (1.4 | ) | | (1.1 | ) | | (10.9 | ) | | (0.1 | ) | | (11.0 | ) |
Non-Taxable | | 0.7 |
| | (0.5 | ) | | 0.2 |
| | 0.6 |
| | (0.8 | ) | | (0.2 | ) |
Held-to-Maturity | | | | | | | | | | | | |
Taxable | | (9.3 | ) | | (6.8 | ) | | (16.1 | ) | | 10.2 |
| | 2.5 |
| | 12.7 |
|
Non-Taxable | | (0.1 | ) | | (0.1 | ) | | (0.2 | ) | | 4.9 |
| | — |
| | 4.9 |
|
Total Investment Securities | | (8.4 | ) | | (8.8 | ) | | (17.2 | ) | | 4.8 |
| | 1.6 |
| | 6.4 |
|
Loans Held for Sale | | 0.2 |
| | — |
| | 0.2 |
| | (0.6 | ) | | — |
| | (0.6 | ) |
Loans and Leases | | | | | | | | | | | | |
Commercial and Industrial | | 5.9 |
| | (2.6 | ) | | 3.3 |
| | 3.6 |
| | (1.2 | ) | | 2.4 |
|
Commercial Mortgage | | 8.1 |
| | (2.1 | ) | | 6.0 |
| | 7.0 |
| | (1.4 | ) | | 5.6 |
|
Construction | | 0.7 |
| | 0.4 |
| | 1.1 |
| | (0.2 | ) | | (0.4 | ) | | (0.6 | ) |
Commercial Lease Financing | | (0.6 | ) | | 1.1 |
| | 0.5 |
| | (0.6 | ) | | 1.6 |
| | 1.0 |
|
Residential Mortgage | | 16.5 |
| | (4.2 | ) | | 12.3 |
| | 4.4 |
| | (4.5 | ) | | (0.1 | ) |
Home Equity | | 4.7 |
| | (2.4 | ) | | 2.3 |
| | 2.2 |
| | (1.7 | ) | | 0.5 |
|
Automobile | | 3.3 |
| | (0.3 | ) | | 3.0 |
| | 3.0 |
| | (0.3 | ) | | 2.7 |
|
Other 2 | | 3.1 |
| | (0.2 | ) | | 2.9 |
| | 4.3 |
| | (1.5 | ) | | 2.8 |
|
Total Loans and Leases | | 41.7 |
| | (10.3 | ) | | 31.4 |
| | 23.7 |
| | (9.4 | ) | | 14.3 |
|
Other | | (0.5 | ) | | 0.6 |
| | 0.1 |
| | (0.1 | ) | | 0.1 |
| | — |
|
Total Change in Interest Income | | 33.3 |
| | (18.4 | ) | | 14.9 |
| | 28.0 |
| | (7.6 | ) | | 20.4 |
|
| | | | | | | | | | | | |
Change in Interest Expense: | | | | | | | | | | | | |
Interest-Bearing Deposits | | | | | | | | | | | | |
Demand | | 0.1 |
| | — |
| | 0.1 |
| | 0.1 |
| | — |
| | 0.1 |
|
Savings | | 0.4 |
| | 0.1 |
| | 0.5 |
| | 0.1 |
| | (0.1 | ) | | — |
|
Time | | (0.7 | ) | | 0.2 |
| | (0.5 | ) | | 0.2 |
| | (0.9 | ) | | (0.7 | ) |
Total Interest-Bearing Deposits | | (0.2 | ) | | 0.3 |
| | 0.1 |
| | 0.4 |
| | (1.0 | ) | | (0.6 | ) |
Securities Sold Under Agreements to Repurchase | | (3.3 | ) | | 2.8 |
| | (0.5 | ) | | (2.1 | ) | | 1.1 |
| | (1.0 | ) |
Other Debt | | 0.5 |
| | (0.1 | ) | | 0.4 |
| | 0.1 |
| | (0.1 | ) | | — |
|
Total Change in Interest Expense | | (3.0 | ) | | 3.0 |
| | — |
| | (1.6 | ) | | — |
| | (1.6 | ) |
Change in Net Interest Income | | $ | 36.3 |
| | $ | (21.4 | ) | | $ | 14.9 |
| | $ | 29.6 |
| | $ | (7.6 | ) | | $ | 22.0 |
|
1 The change in interest income and expense not solely due to changes in volume or rate has been allocated on a pro-rata basis to the volume and rate columns.
2 Comprised of other consumer revolving credit, installment, and consumer lease financing.
Net Interest Income
Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities. Net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earning assets.
Net interest income was $394.1 million in 2015, an increase of $14.4 million or 4% compared to 2014. On a taxable-equivalent basis, net interest income was $406.0 million in 2015, an increase of $14.9 million or 4% compared to 2014. The increase in our net interest income was primarily due to a higher level of earning assets. Average earning assets increased by $771.0 million in 2015 compared to 2014. Earning assets increased primarily due to increased deposits. Deposits grew by $618.0 million in 2015 compared to 2014. Net interest margin was 2.81% in 2015, a four basis points decrease from 2014, primarily due to lower yields in our investment securities and loans, reflective of the continued low interest rate environment.
Yields on our earning assets decreased by six basis points in 2015 compared to 2014. Yields on our investment securities portfolio decreased by 13 basis points in 2015 compared to 2014 primarily due to reinvestment in lower yielding securities due to the low interest rate environment, partially offset by lower premium amortization. Yields on our loans and leases decreased by 15 basis points, with lower yields in nearly every loan category in 2015 compared to 2014 as a result of the low interest rate environment. Yields on our commercial and industrial portfolio declined by 25 basis points due in part to a large interest income recovery in the third quarter of 2014. Yields on our commercial mortgage portfolio declined by 15 basis points. Yields on our residential mortgage portfolio decreased by 17 basis points due to continued payoff activity of higher-rate mortgage loans and the addition to our portfolio of lower-rate mortgage loans. Partially offsetting the lower yields on our earning assets in 2015 compared to 2014 were slightly lower funding costs. The lower funding costs were offset by the higher rates paid on our securities sold under agreements to repurchase. Rates paid on our securities sold under agreements to repurchase increased by 41 basis points due to a decrease in repurchase agreements with local government entities which have relatively shorter terms at lower interest rates. The remaining balance in our repurchase agreements consists mainly of those with private entities which have relatively longer terms at higher interest rates.
Average balances of our earning assets increased by $771.0 million or 6% in 2015 compared to 2014 primarily due to an increase in deposits. Average balances of our loan and lease portfolio increased by $1.0 billion primarily due to higher average balances in our commercial and industrial, commercial mortgage, and residential mortgage portfolios. The average balance of our commercial and industrial loan portfolio increased by $182.0 million due to an increase in corporate demand for funding. The average balance of our commercial mortgage portfolio increased by $212.0 million due to increased demand from new and existing customers as the real estate market in Hawaii continued to improve. The average balance of our residential mortgage portfolio increased by $396.8 million primarily due to an increase in loan origination and refinance activity. Partially offsetting the increase in the average balances of our loan and lease portfolio was a $395.0 million decrease in the average balance of our total investment securities portfolio in 2015 compared to 2014 primarily due to the shift in the mix of our earning assets from investment securities to loans. In 2015, we continued to reduce our positions in mortgage-backed securities issued by Ginnie Mae and we increased our holdings in Fannie Mae and Freddie Mac mortgage-backed securities as well as Small Business Administration debt securities. However, Ginnie Mae mortgage-backed securities remained our largest investment type.
Average balances of our interest-bearing liabilities increased by $403.6 million or 4% in 2015 compared to 2014 primarily due to continued growth in our relationship checking and savings deposit products as well as growth in our business savings product, partially offset by decreases in our time deposits and repurchase agreements.
Net interest income was $379.7 million in 2014, an increase of $20.7 million or 6% compared to 2013. On a taxable-equivalent basis, net interest income was $391.1 million in 2014, an increase of $22.0 million or 6% compared to 2013. The increase in our net interest income was primarily due to growth in both our commercial and consumer lending portfolios. Net interest margin was 2.85% in 2014, a four basis points increase from 2013. The higher margin in 2014 was primarily due to our loans and leases, which generally have higher yields than investment securities, comprising a larger percentage of our earning assets compared to 2013. In addition, the yields on investment securities improved due in part to lower premium amortization.
Yields on our earning assets increased by one basis point in 2014 compared to 2013. Yields on our investment securities portfolio increased by 10 basis points in 2014 compared to 2013, due in part to lower premium amortization. The increase in the yields on our investment securities portfolio was partially offset by the lower yields in nearly every category of our loan and lease portfolio. Yields on our residential mortgage portfolio decreased by 20 basis points in 2014 compared to 2013 primarily due to continued payoff activity of higher rate mortgage loans and the addition to our portfolio of lower rate mortgage loans. Also contributing to the increase in our net interest margin in 2014 compared to 2013 were slightly lower funding costs due to marginally lower rates paid on our time deposits, partially offset by higher rates paid on our securities sold under agreements to repurchase. Rates of our securities sold under agreements to repurchase increased by 14 basis points primarily due to local
government entities transferring much of their funds previously invested in short-term (and therefore low-yielding) repurchase agreements into public time deposits, leaving the balance in our repurchase agreements consisting mainly of those with private entities. These agreements with private entities have longer terms at relatively higher interest rates.
Average balances of our earning assets increased by $589.1 million or 4% in 2014 compared to 2013 primarily due to an increase in the average balances of our loan and lease portfolio. Average balances of our loans and leases increased by $521.7 million in 2014 compared to 2013 primarily due to growth in our commercial mortgage, commercial and industrial, and residential mortgage loan portfolios. The average balance of our commercial mortgage portfolio increased by $178.6 million primarily due to increased demand from new and existing customers as both investors and owner occupants looked to refinance and/or acquire new real estate assets, reflective of the strong Hawaii real estate market. The average balance of our commercial and industrial loan portfolio increased by $104.6 million due to an increase in corporate demand for funding from new and existing customers. The average balance of our residential mortgage loan portfolio increased by $102.0 million primarily due to our decision to add more conforming saleable loans to our portfolio and a decrease in payoffs resulting from lower refinancing activity. The average balance of our total investment securities portfolio remained relatively unchanged in 2014 compared to 2013. However, the composition of our portfolio changed slightly in 2014 as we reduced our positions in mortgage-backed securities issued by Ginnie Mae and re-invested these proceeds, in part, into mortgage-backed securities issued by Fannie Mae. However, Ginnie Mae mortgage-backed securities remained our largest investment type.
Average balances of our interest-bearing liabilities increased by $345.0 million or 4% in 2014 compared to 2013 primarily due to our efforts to grow our relationship checking and savings deposit products. Average time deposit balances also increased during the year, however this increase was primarily the result of local government entities transferring funds previously held in securities sold under agreements to repurchase.
Provision for Credit Losses
The provision for credit losses (the "Provision") reflects our judgment of the expense or benefit necessary to achieve the appropriate amount of the Allowance. We maintain the Allowance at levels adequate to cover our estimate of probable credit losses as of the end of the reporting period. The Allowance is determined through detailed quarterly analyses of our loan and lease portfolio. The Allowance is based on our loss experience and changes in the economic environment, as well as an ongoing assessment of our credit quality. We recorded a Provision of $1.0 million in 2015, a negative Provision of $4.9 million in 2014, and no Provision in 2013. For further discussion on the Allowance, see the "Corporate Risk Profile – Credit Risk" section in MD&A.
Noninterest Income
Table 3 presents the major components of noninterest income for 2015, 2014, and 2013.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest Income | | | | | | | | | | | Table 3 | |
|