DBRS Comments on Bank of Hawaii Corporation’s 3Q12 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 3Q12 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 $41.2 million for the quarter, up from $40.7 million in the second quarter, but down from $43.3 million in 3Q11.

Highlights of the quarter include strong mortgage banking results, margin stability, loan growth, 6% growth in consumer checking accounts, and continued improvements in already strong asset quality metrics that contributed to no loan loss provision in 3Q12. Moreover, Hawaiian economic indicators improved during the quarter reflecting higher visitation levels and higher overall visitor spending, while the unemployment rate remains materially below the national average at 5.7%.

Net interest income (FTE) declined $1.7 million to $96.2 million, even with margin stability and loan growth, due to lower securities portfolio balances. Specifically, average loans and leases grew 1.3% to $5.7 billion, while average investment securities declined by 4.6% to $6.9 billion. Positively, the Company was able to maintain its net interest margin at 2.98% when most banks reported margin compression. Meanwhile, noninterest income increased $5.5 million to $52.4 million sequentially, almost entirely attributable to improved mortgage banking income of $11.7 million, up from $7.6 million in 2Q12. Overall, total revenue increased 2.6%.

Expenses increased a high 5.1% to $84.9 million, but included $1 million of severance, $1 million of expenses related to the launch of a new consumer credit card, $1 million of higher incentive compensation accruals, as well as higher expenses associated with the robust mortgage banking results. Overall, DBRS views expenses as well-managed.

Asset quality metrics remain quite strong. Specifically, non-performing assets declined $1.2 million to $40.3 million, or just 0.70% of total loans and leases and foreclosed assets. DBRS notes that Hawaii is a judicial foreclosure state, which lengthens the foreclosure process. As a result, residential mortgage loans comprised 68% of all nonaccrual loans, but loss content should remain very low, especially given the improving real estate trends on Oahu where most of the loans are originated. Meanwhile, net charge-offs remain negligible at $1.5 million, or 0.10% of average total loans and leases (annualized). Even without any loan loss provisions this quarter, the allowance for loan and lease losses remains strong at 2.27% of total loans and leases. BOH noted that the recently regulatory guidance involving the treatment of consumer loans following Chapter 7 bankruptcy had no impact on the Company, as its current policy already incorporated the guidance.

At $6.6 billion, or 49% of total assets, the Company’s securities portfolio remains conservatively managed. Indeed, the average duration of the available-for-sale portfolio is 2.26 years, while the average duration for the entire portfolio is 2.39 years. Moreover, the high quality portfolio was in an unrealized gain position of $201 million at quarter-end.

Capital metrics remained sound. Favorable market valuations in the available-for-sale portfolio, a smaller balance sheet, better earnings, and less share repurchases increased the Company’s tangible common equity to tangible assets ratio by 44 basis points to 7.44% during the quarter. BOH is on pace to return 100% of net income to shareholders through share repurchases and dividends.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. 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
Approver: Roger Lister
Initial Rating Date: 5 January 2006
Most Recent Rating Update: 16 October 2012

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