DBRS Comments on Bank of Hawaii Corporation’s 2Q13 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 2Q13 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 $37.8 million for the quarter, up from $36.0 million in the first quarter, but down from $40.7 million in 2Q12. DBRS notes that 2Q13 net income did benefit from the release of tax reserves totaling $1.1 million following a settlement.

Liquidity, capital, and asset quality remain strong, but revenue growth remains the Company’s primary challenge. Despite lower sequential quarter revenues, expenses declined at a higher rate resulting in positive operating leverage. Positively, period-end loan and lease balances grew 1.3% during the quarter and the higher interest rates seen in the latter half of the quarter should bolster earnings over the longer term. Moreover, the Hawaiian economy continues to improve.

Net interest income, on a taxable equivalent basis, declined $1.2 million to $89.8 million during the quarter, as net interest margin compressed five basis points to 2.77%. The compression was driven by higher levels of liquidity, as well as lower asset yields. Positively, the Company indicated that the margin should at least stabilize in 2H13, if not increase, given the current interest rate environment.

Noninterest income was relatively stable increasing $0.3 million to $48.0 million sequentially. Strong growth in fees, exchange, and other service fees were partially offset by a 9.2% decline in mortgage banking revenues. The Company noted that it expects a meaningful slowing in its mortgage banking business given the recent increase in interest rates and the lack of housing inventory available in Hawaii.

Expenses were well controlled; declining $3.2 million to $81.2 million from the seasonally higher 1Q13. Adjusting for severance, expenses declined 3.1% to $80.3 million. Overall, the Company’s efficiency ratio was 59.96%, an improvement from 61.90% in the first quarter.

Asset quality remains very strong. Indeed, non-performing assets (NPAs) declined, while net charge-offs (NCOs) were relatively stable. Specifically, NPAs declined by $2 million to $36.4 million, or just 0.62% of total loans and leases and foreclosed real estate. Meanwhile, NCOs were $2.3 million, or 0.16% annualized of total average loans and leases compared to 0.14% in 1Q13. Despite the fourth consecutive quarter of no provision for credit losses, the allowance for loan and lease losses remains strong at 2.13% of total loans and leases. BOH noted that if current economic and asset quality trends continue, the Company would require a lower level of allowance.

The higher rates negatively impacted the fair value of the Company’s available-for-sale (AFS) securities portfolio by $46.6 million causing accumulated other comprehensive income (AOCI) to turn negative in the quarter. The decline in AOCI, the repurchase of $15.0 million of common stock, and the Company’s dividend (payout ratio was 52.94%), caused the tangible common equity to tangible assets ratio to decline 40 basis points during the quarter to a still sound 6.97%.

DBRS notes that the $6.8 billion securities portfolio represents approximately half of total assets. To help mitigate AOCI/capital volatility in a rising rate environment, the Company had approximately 59% of the portfolio in held-to-maturity (HTM) at June 30, 2013. BOH noted that the average duration of the AFS portfolio was 2.96 years, while the HTM portfolio was 3.98 years.

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

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