Tax-law change weighs on Bankoh's earnings
The bank's profits fell nearly 20 percent in the second quarter
Bank of Hawaii Corp., the state's second-largest bank in terms of assets, said yesterday that earnings dropped 19.9 percent in the second quarter after the company took a charge of about $9 million due to a change in a federal tax law.
The company also said a flattening yield curve, resulting from 17 straight interest-rate increases, cut into its margins.
Net income fell to $37.2 million, or 73 cents a share, from $46.4 million, or 87 cents a share, a year earlier. The previously announced charge reduced the bank's net income by 17 cents a share and was the result of the recently enacted Tax Increase Prevention and Reconciliation Act. The new law repealed a tax exclusion for a portion of income from foreign sales corporations. It affected Bankoh because the bank holds an equity interest in the leases of two aircraft leased to foreign airlines.
The earnings per share matched the estimate of 73 cents by analyst Brett Rabatin of Nashville, Tenn.-based FTN MidWest Research.
"Their revenues were slightly lower from the previous quarter and they had a little more margin pressure than expected, but given the company's strong discipline with operating expenses, they still posted very strong core numbers for (the second quarter)," he said.
The consensus of eight analysts, including Rabatin, surveyed by Thomson Financial was 86 cents, but not all of the analysts included the 17-cents-a-share charge in their calculation.
"The charge was the big thing; other than that, we're performing pretty well on a consistent basis," said Allan Landon, chairman and chief executive of Bank of Hawaii.
Bankoh also said it was lowering its previous full-year earnings estimate to $178 million from $187 million to reflect the $9 million charge.
The bank, which historically announces dividend increases in October, maintained its quarterly payout at 37 cents a share. It will be distributed on Sept. 15 to shareholders as of Aug. 31. The board also boosted the bank's share buyback program by $100 million to a total of $1.55 billion.
"Our underlying financial performance continues to be strong despite the disappointing effect of this change in tax legislation," Landon said. "We are especially pleased with our commercial and consumer loan growth, asset quality and expense control."
Bankoh said its net interest income, which reflects the difference between what it pays depositors and what it brings in from loans, fell 0.9 percent in the quarter to $100.12 million on a taxable equivalent basis from $101.1 million a year earlier. It attributed the decrease to a $600,000 adjustment related to the tax charge and more interest paid to depositors.
The bank's net interest margin decreased to 4.25 percent from 4.36 percent in the year-earlier period.
The Federal Reserve's string of rate increases to 5.25 percent from 1 percent has been squeezing lenders and created a flat yield curve because long-term rates have stayed constant while short-term rates have risen.
Landon said the higher interest rates affected the bank more in the second quarter than it had in previous periods.
"As rates get higher, customers are a little bit more careful how they manage their extra cash and they tend to seek higher rates (such as certificates of deposit or money-market accounts)," Landon said. "Generally, though, (the customers) stay within the bank."
Noninterest income, which includes service charges and fees, rose 5 percent to $53.2 million from $50.7 million.
Bankoh's total assets rose 2.6 percent to $10.3 billion from $10.1 billion. Total loans and leases were $6.4 billion, up 4.7 percent from $6.2 billion a year earlier.
Commercial loans increased 5.7 percent to $2.32 billion from $2.19 billion while continued growth in home-equity lending and the state's strong residential real estate market enabled the bank's consumer loans to rise 4.1 percent to $4.1 billion from $3.96 billion a year ago.
Deposits increased 0.5 percent to $7.8 billion from $7.7 billion a year earlier. However, deposits were down from $8.2 billion at the end of the first quarter primarily due to the drawdown of a large commercial deposit. The bank did not identify the depositor but said more than $300 million was placed on deposit for three to four days at the end of the first quarter.
The bank said that the total number of deposits grew from the year-earlier period and from last quarter even as customers sought out higher-yielding investments.
Nonperforming assets decreased 50.8 percent to $5.4 million from $10.9 million a year ago. The ratio of nonperforming assets to loans, foreclosed real estate and other investments improved to 0.08 percent from 0.18 percent a year ago.
Bankoh's return-on-assets ratio, which indicates how many dollars of profit it achieves for each dollar of assets it controls, fell to 1.47 percent from 1.87 percent a year ago. Excluding the tax adjustment, last quarter's ratio was 1.81 percent.
The bank's return-on-equity ratio fell to 21.7 percent from 25.98 percent a year ago. Excluding the charge, the return on average equity last quarter was 26.86 percent.