DBRS Comments on Bank of Hawaii Corporation’s 2Q12 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 2Q12 earnings of Bank of Hawaii Corporation (BOH or the Company). DBRS rates the Company’s Issuer & Senior Debt at A (low) with a Stable trend. The Company reported net income of $40.7 million for the quarter, down from $43.8 million in the first quarter, but up from $35.1 million in 2Q11. Even with the sequential quarter decline in net income, DBRS views the results positively. Indeed, the Company delivered both loan and deposit growth, controlled expenses, and maintained its strong balance sheet.

Net interest income (FTE) declined $2.1 million to $97.9 million reflecting margin pressure from the low rate environment. Specifically, the margin contracted 8 basis points to 2.98% and management noted that the Company has little leeway to further reduce deposit costs. Meanwhile, noninterest income declined as well totaling $46.8 million compared to $48.1 million in 1Q12 despite stronger mortgage banking revenues. However, excluding two non-core items in 1Q12, noninterest income would have increased by $1.2 million. Lastly, expenses declined by $4.5 million, or 5%, to $80.7 million. DBRS notes that 1Q12 expenses were inflated by seasonally higher salaries and benefits expenses, and the Company’s $1.2 million personal computer refresh. Nonetheless, BOH has done a very good job of controlling expenses with a 2Q12 efficiency ratio of 56.77%.

During the quarter, average loans and leases increased 1.4% to $5.6 billion primarily driven by higher residential mortgage balances and, to a lesser extent, commercial mortgages. Average deposit grew $192 million to $10.6 billion and more than funded the loan growth. The Company noted that consumer checking accounts have increased by 8% over the past year.

Even though NPAs and NCOs both increased modestly, asset quality remains strong. Specifically, NPAs totaled $41.5 million, or only 0.73% of total loans and leases and foreclosed real estate. DBRS notes that 65% of NPAs are residential mortgages, which are impacted by the lengthy judiciary foreclosure process in Hawaii. The Company does have $31.1 million of loans, primarily residential real estate loans, which have been restructured, but are not included in NPAs. BOH’s higher risk loan portfolio, which is comprised of aircraft leases, residential land loans, certain residential home building loans and certain home equity loans, was down another $4.6 million during the quarter to $75.1 million. Meanwhile, net loan and lease charge-offs totaled $3.8 million, or 0.27% of annualized total loans and leases, and was up from $3.4 million, or 0.24% in 1Q12. Even with charge-offs exceeding provisions in recent quarters, the allowance for loan and lease losses remains strong at $132.4 million, or 2.34% of total loans and leases.

Capital metrics remained relatively stable during 2Q12 with the Company’s tangible common equity to tangible assets ratio declining two basis points to 7.00%. On a risk-weighted asset basis, this ratio improves to a robust 17.57%. Management indicated that preliminary Basel III analysis had little effect on capital metrics and could result in a modest increase. During the quarter, the Company repurchased $20.0 million of common stock under its share repurchase program and has already repurchased another $3.2 million of common stock during 3Q12. With a recent increase in the authorization, BOH can repurchase another $95.8 million in common stock.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Michael Driscoll
Approver: Roger Lister
Initial Rating Date: 5 January 2006
Most Recent Rating Update: 8 August 2011

For additional information on this rating, please refer to the linking document under Related Research.