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.

The ratings confirmation and Stable trend reflect BOH’s deeply rooted, defensible banking franchise in Hawaii that benefits from a strong brand, and market leading customer convenience. Moreover, core deposit funding remains robust and asset quality continues to outperform most of the industry. The ratings also consider the Company’s dependence on the Hawaiian economy, loans and securities portfolios that are heavily concentrated in real estate, as well as the Company’s ability to grow revenues in today’s slow growth, low interest rate operating environment.

Over the past year, the Company has delivered solid loan growth, modest deposit growth, while lowering expenses. Nonetheless, continued net interest margin pressure and weaker mortgage banking results have more than offset expense reductions leading to lower net income and pressured income before provisions and taxes (IBPT). Specifically, for the first nine months of 2013, the Company reported net income of $111.4 million, down 11% from the same period in 2012. Meanwhile, 3Q13’s revenues declined by $10.0 million, or 6.8%, while expenses excluding separation expense declined by $2.6 million, or 3.1%, from 3Q12 levels. Like for many banks, DBRS views growing revenues as the Company’s primary challenge. Positively, the margin expanded 6 basis points to 2.83% in 3Q13 reflecting lower premium amortization, loan growth, and a steepening yield curve.

The Hawaiian economy continues to improve in 2013 with strong tourism, relatively low unemployment, and rising housing prices. Through the end of August, visitor arrivals and total spending both increased by 5.1% relative to the prior year. Housing prices are higher and inventory in Oahu remains low with less than a three month supply.

BOH benefits from having the largest and most convenient footprint within Hawaii with the most branches, including in-store branches at highly trafficked retailers. Positively, 82% of the Company’s branches have either a top one or two market share position in their neighborhoods. The robust deposit franchise contributes to excellent funding and liquidity with core deposits representing a very large 170% of loans and leases. Moreover, the Company’s 3Q13 cost of funds was a low 0.31%.

Asset quality remains strong. Specifically, total nonperforming asset (NPA’s) were only $33.8 million, or just 0.56% of total loans and leases, and foreclosed real estate at September 30, 2013. DBRS notes that 61% of all NPAs were residential mortgage loans that had a weighted average current LTV ratio of 69%, so losses are unlikely. With Hawaii being a judicial foreclosure state, the foreclosure process tends to be lengthy. Meanwhile, net charge-offs remain low as well at only $5.2 million through the first nine months, or just 0.12% of average loans and leases outstanding (annualized). Additionally, the Company has experienced net recoveries within its commercial portfolio this year. Overall, DBRS views the allowance for loan and lease losses as strong at 2.06% and expects reserves to continue to trend downward in coming quarters given BOH’s healthy asset quality.

The securities portfolio is comprised of high quality, liquid securities. Nonetheless, the portfolio’s large size ($6.9 billion, or 50% of total assets) is a concern once interest rates move higher. Indeed, the available-for-sale securities portfolio has already experienced a $58.4 million after-tax decrease in the fair value of securities this year. To help mitigate interest rate risk and its impact on capital, the Company has the preponderance of its securities in held-to-maturity. While this reduces capital volatility, it does lower financial flexibility. Moreover, to lower extension risk, the Company has reduced its positions in MBS issued by Ginnie Mae. DBRS notes that the average duration for the entire investment portfolio was 3.78 years at September 30, 2013 with approximately 2/3rds of the portfolio now held in HTM.

Capital remains sufficient even with an aggressive capital return to shareholders. During the first nine months of 2013, the Company repurchased $33.2 million of common stock and paid $60.5 million in dividends. Combined, this return of capital equates to 84% of YTD earnings. Nonetheless, capital remains sound with a tangible common equity to tangible assets ratio of 6.96%, which improves to a strong 15.43% on a risk-weighted assets basis. At quarter-end, the Company’s Tier 1 leverage ratio was 6.95% and management noted it wanted this metric to be above 7% by year-end. The Company disclosed that under Basel III rules, BOH’s capital levels would remain “well-capitalized” under the new standards. DBRS notes that the Company must submit to its first stress test to the FRB by March 31, 2014.

Bank of Hawaii Corporation, a diversified financial services provider headquartered in Honolulu, HI, reported $13.8 billion in assets at September 30, 2013.

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 applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments. These can be found can be found at: http://www.dbrs.com/about/methodologies

[Amended on June 12, 2014, to reflect actual methodologies used.]

The sources of information used for this rating include the 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: 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 below.