A sharp drop in mortgage income cut into Bank of Hawaii Corp.’s profits last quarter as refinancing statewide began drying up.
The state’s second-largest bank’s net income slipped 3.1 percent from the year-earlier period.
Bankoh reported Monday it had a profit of $39.1 million, or 88 cents a share, in the October-to-December period. That beat analysts’ estimates of 86 cents a share. A year ago the bank had net income of $40.3 million, or 90 cents a share.
"We’re pleased with our financial results," said Peter Ho, chairman, president and chief executive officer of Bankoh. "Overall, loan demand was solid this quarter. Outstanding loan balances grew 1.5 percent from the previous quarter. We also continue to grow overall deposits."
Bankoh, however, experienced what other banks around the country are dealing with as rising mortgage rates lead to lower mortgage income.
The bank’s mortgage income, which includes what it receives from refinancings as well as loan sales it makes to the secondary market, dropped 75 percent to $2.8 million in the fourth quarter from $11.3 million in the year-ago period. Overall, its noninterest income, which includes mortgage revenue, fell 14.5 percent to $45.3 million from $53 million.
Refinancings nationwide soared in 2012 because the Federal Reserve was purchasing mortgage-backed securities each month to drive down interest rates and stimulate the economy. But with the Fed now tapering its purchases and interest rates rising, refinancing activity has slowed.
"As rates dropped precipitously in 2012, refinance activity accelerated, and gains on sale on mortgage activity (to secondary markets) grew in lock step," Ho said. "In 2013, with rates rising, refinance activity slowed materially. That resulted in lower mortgage loan activity and lower mortgage income for the industry as a whole and Bank of Hawaii."
Nashville, Tenn.-based analyst Brett Rabatin said the severity of the drop of Bankoh’s mortgage income was a little surprising but not unexpected.
"We’ve seen that throughout the industry," said Rabatin of brokerage firm Sterne Agee. "The decline (for Bankoh) was a little bit more than we thought."
Low inventory levels for Hawaii’s housing market exacerbated the reduced mortgage income that Bankoh received last quarter, Ho said.
Still, the bank originated more mortgages in 2013 than any other bank in the state, according to Honolulu-based title and escrow company Title Guaranty.
Ho said the bank makes more money through refinancings than through the purchase of new homes.
"When you look at the mortgage income through pure refinance activity compared to the number of mortgages that become available through new home purchases, the re-fi market is just a lot larger," he said.
While noninterest income was down, Bankoh showed improvement in most other areas. Net interest income, the spread between its lending rates and its deposit rates, rose 2 percent to $92.1 million from $90.3 million a year ago. Net interest margin decreased to 2.85 percent from 2.87 percent but improved from 2.83 percent in the third quarter.
Assets grew 2.6 percent to $14.1 billion from a year ago, and deposits rose 3.3 percent to $11.9 billion.
Loans and leases increased 4.1 percent to $6.1 billion, with commercial loans, such as general business loans, equipment leasing and commercial mortgages, jumping 9.2 percent to $2.5 billion and consumer loans edging up 0.8 percent to $3.6 billion.
"Businesses in Hawaii have seen brighter skies out there for quite a while, so they’re beginning to invest more in their business," Ho said. "It’s very normal for consumers to be a lagging indicator, but even on the consumer side, we’re beginning to see improvement in categories like auto lending. I think we’re going to continue to see good commercial growth and the consumer loan segment pick up as well as they begin to feel confident in the Hawaii economy."
For the year the bank’s net income fell 9.4 percent to $150.5 million from $166.1 million.
Bankoh’s shares fell 90 cents, or 1.5 percent, to $57.84 on the New York Stock Exchange before the bank announced earnings after the market closed.