DBRS Comments on Bank of Hawaii Corporation’s 1Q13 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 1Q13 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 $36.0 million for the quarter, down from $40.3 million in the fourth quarter and from $43.8 million in 1Q12.

Highlights of the quarter include the maintenance of a very strong balance sheet, modest commercial loan growth and solid expense control. Nonetheless, earnings were down sequentially reflecting considerably lower mortgage banking income, continued net interest margin pressure, and seasonally higher payroll-related expenses. Tourism continues to strengthen with total visitor arrivals for the first two months increasing by 6.9%, while spending increased by 7.6%. Meanwhile, the seasonally adjusted unemployment rate for Hawaii remains low at 5.1%. Management noted that they have yet to see any sort of negative impact stemming from the sequester.

Net interest income, on a taxable-equivalent basis, decreased $1.7 million sequentially to $91.0 million reflecting continued net interest margin pressure and two fewer days in the quarter. Specifically, the margin contracted five basis points to 2.82% driven primarily by lower reinvestment yields and higher premium amortization.

During the quarter, most fee revenue line items declined resulting in a $5.2 million decrease in noninterest income to $47.8 million. The decline was almost entirely attributable to weaker mortgage banking revenue, which declined by $4.9 million reflecting lower volumes and tighter spreads on loan sales. The Company noted that first quarter mortgage applications declined by 7% sequentially.

Noninterest expense increased $0.9 million to $84.4 million sequentially, primarily driven by seasonally higher payroll-related expenses, which totaled approximately $3 million. The Company remains highly focused on lowering expenses given the difficult revenue environment. DBRS notes that in the past year, the Company has closed 6 branches, or 7.4%, of its footprint.

For the third consecutive quarter, the Company did not record a provision for credit losses, as credit quality remains strong and the Hawaiian economy has improved. Indeed, non-performing assets totaled just $38.4 million, or just 0.66% of total loans and leases and foreclosed real estate. Meanwhile, net charge-offs remained very low at $2.0 million, or 0.14% annualized of total loans and leases. Overall, the Company’s allowance for loan and lease losses remains solid at $126.9 million, or 2.19% of total loans and leases. Absent significant deterioration in the economy, the allowance should likely continue to trend down in 2013.

Modest loan growth within the commercial loan and automobile portfolios were more than offset by declines within the residential mortgage and home equity portfolios, as total loans and leases declined $71.6 million to $5.78 billion. Meanwhile, deposits were also down driven by lower public time deposits, although consumer and business deposit balances increased.

The $6.9 billion securities portfolio had an unrealized gain of $145 million and a duration of 3.23 years at quarter-end.

Capital remains strong with the tangible common equity to tangible assets ratio improving 14 basis points during the quarter to 7.37%. In the current quarter, BOH repurchased $6.6 million of common shares and had a dividend payout ratio of 55.56%.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]