DBRS Confirms Bank of Hawaii Corporation at A (low); Trend Stable

DBRS, Inc. (DBRS) has today confirmed all ratings of Bank of Hawaii Corporation (BOH or the Company) and its related bank subsidiary, including the Company’s Issuer & Senior Debt rating at A (low). The trend for all ratings remains Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

BOH’s ratings reflect its deeply rooted, defensible banking franchise in Hawaii with an operating history that dates back to 1897. The Company’s balance sheet remains strong underpinned by robust deposit funding, better than peer asset quality and sufficient capital. Moreover, the strength of the balance sheet has allowed BOH to outperform most banks over the past several years. The ratings also consider the Company’s dependence on the Hawaiian economy, a loan portfolio that is heavily reliant on real estate lending, as well as the Company’s ability to grow revenues in today’s slow growth, low interest rate operating environment.

As the largest independent financial institution in Hawaii which boasts the most convenient footprint, excellent customer service, and strong brand recognition, DBRS views BOH franchise as strong and defensible. Indeed, the Company’s low cost, stable core deposit base represents a very large 168% of loans. Moreover, BOH continues to see steady net account growth in both consumer and business checking even with the Company already having a 50% deposit account penetration rate. The ample, low cost deposit base, allows BOH to generate strong returns without taking more risk.

The Company’s earnings power remains solid despite pressure from new regulations and the low interest rate environment. Indeed, 1H12 revenues contracted by 4% compared to 1H11 with both net interest and noninterest income declining. Positively, the Company has done a very good job managing expenses given the lack of revenue growth. Indeed, expenses excluding the ‘PC refresh’, have trended downward the past three quarters. During 2Q12, every expense category with the exception of professional fees (modest increase) have declined in 1H12 compared to 1H11; benefiting from tightly controlled costs and headcount reductions. DBRS notes that full-time employees have declined by 4% from year ago levels and the Company has closed some branches as well. Overall, disciplined expense control has enabled BOH to grow its income before provisions and taxes (IBPT) each quarter in 2012. DBRS expects modest IBPT growth to continue in 2012 with the return of loan growth and stronger mortgage banking revenues.

Even though nonperforming assets (NPAs) and net charge-offs (NCOs) both increased modestly in 2Q12, 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 remain sound and were 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.

As a result of its strong balance sheet and sound capital metrics, the Company has been aggressive in returning capital to shareholders. Indeed, in 1H12, the Company repurchased 1.1 million shares for a total consideration of $50.0 million and BOH paid out $41.1 million in dividends. In aggregate, the $91.1 million in capital distributions exceeded 1H12 net income of $84.6 million by $6.5 million. DBRS expects the pace of capital distributions to slow as loan growth returns. Regardless, DBRS notes that management will maintain its conservative risk profile including maintaining sufficient capital metrics.

Bank of Hawaii Corporation, a diversified financial services provider headquartered in Honolulu, HI, reported $13.9 billion in assets at June 30, 2012.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Rating Committee Chair: William Schwartz
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.