DBRS: Bank of Hawaii Reports Higher 2Q14 Earnings; Favorable Balance Sheet Trends

Summary:
• Net income of $41.5 million increased 7.5% sequentially, reflecting loan growth and strong expense control.
• Balance sheet fundamentals remain favorable with loan and deposit growth, strong and improving asset quality, and still sound capital.
• DBRS rates Bank of Hawaii Corporation Issuer & Senior Debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) considers Bank of Hawaii Corporation’s (BOH or the Company) 2Q14 results as strong. Indeed, the Company reported broad-based loan growth, robust deposit growth, net recoveries and sound capital. Sequentially, higher revenues and lower expenses resulted in positive operating leverage.

A strong real estate market, higher visitor spending despite lower visitor levels, and increased construction activity have contributed to a stronger Hawaiian economy. During the quarter, BOH reported broad-based loan growth with both commercial and consumer loan categories experiencing growth. While the real estate markets are strong, mortgage production has shifted away from refinancings to purchase. As a result, mortgage banking revenues are down substantially from a year ago, but were only down modestly sequentially.

The broad-based loan growth and a relatively stable net interest margin resulted in net interest income increasing $1.2 million to $97.3 million, on a taxable equivalent basis. Meanwhile, noninterest income was down modestly. The Company noted that it will continue to harvest gains from its Visa stock holdings, which DBRS does not consider core in nature, but is beneficial and adds financial flexibility.

Expenses remained very well controlled declining by $2.5 million from the seasonally higher payroll-related expenses incurred in 1Q14. Despite more compliance-related spending, the Company remains comfortable with its guidance of FY 14 expenses declining at least 1%. Overall, BOH’s efficiency ratio improved to 58.38%.

During the quarter, BOH experienced net recoveries, while delinquencies and nonperforming assets declined. Moreover, the Company’s riskier loan segments contracted. As a result, BOH had a negative provision for credit losses in the quarter. Nonetheless, at 1.77%, the allowance for loan and lease losses remains strong.

The Board increased its share repurchase authorization during the quarter. The Company noted that it would likely increase its pace of share repurchases in 2H14, as long as its Tier 1 leverage ratio remained above 7% (was 7.20% at quarter-end).

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

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