DBRS: Bank of Hawaii’s 1Q14 Earnings Down Modestly QoQ, Lower Mtg Bkg and Seasonally Higher Expenses

Summary:
• Seasonally higher expenses and lower Mortgage Banking revenues resulted in a 1% decline in net income to $38.6 million.
• The Company was once again able to grow both loans and deposits during the quarter, and further loan growth, including consumer loans, is expected to continue.
• DBRS rates Bank of Hawaii Corporation Issuer & Senior Debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) views Bank of Hawaii Corporation’s (BOH or the Company) 1Q14 results as sound and consistent, as the Company once again delivered loan and deposit growth, while maintaining its strong balance sheet. While income before provisions and taxes was down modestly sequentially, a stabilizing net interest margin (NIM), expected continued loan growth, and strong expense discipline have positioned the Company well to generate positive operating leverage for 2014.

The Hawaiian economy remains strong even with modest declines in visitor numbers and spending following a record 2013. Construction has rebounded and a major rail project has finally been approved, all of which should help drive loan growth. Importantly, consumer loan demand has picked up contributing to broad-based loan growth.

The Company’s net interest income was higher sequentially benefitting from loan growth and a two basis point expansion in NIM. However, most fee-based revenues declined, with the sharpest drop coming in Mortgage Banking. While production has slowed, BOH has been retaining more of its residential mortgage production rather than selling it.

During the quarter, BOH sold some Visa shares for a $2.2 million gain, which DBRS does not consider core in nature. Nonetheless, the Company still has 482,000 Visa shares left and noted that it would likely sell more shares over the next several quarters adding some financial flexibility.

Noninterest expenses increased 1%, but included seasonally higher payroll-related expenses, as well an operating loss. Absent these items, expenses would have been down sequentially. The Company remains comfortable with its guidance of expenses declining by 1%-2% for FY14.

The Company’s balance sheet remains healthy and strong during the quarter. Indeed, asset quality improved with lower nonperforming assets, net charge-offs, and further reductions in BOH’s higher risk loan portfolios. Meanwhile, higher deposit balances further enhanced its robust liquidity. Lastly, the Company’s strong capital remained relatively stable despite balance sheet growth, dividends, and share repurchases.

DBRS rates Bank of Hawaii Corporation Issuer & Senior Debt at A (low) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]