DBRS: Bank of Hawaii Reports 3Q14 Positive Operating Leverage; Strong Loan Growth

Summary:
• Net income of $41.8 million increased 1% sequentially, reflecting positive operating leverage and continued excellent asset quality trends.
• Reported strong broad-based average loans and leases growth of 3.4% sequentially.
• 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) 3Q14 results as a continuation of strong performance trends highlighted by broad-based loan growth, ample deposit funding, pristine asset quality and sound capital. Reflective of these trends, BOH generated positive operating leverage for the second consecutive quarter.

Economic trends remain favorable with higher visitor spending, low unemployment, house price appreciation and growing construction activity. As a result, BOH once again reported broad-based loan growth with average loan and lease balances growing 3.4% sequentially.

Positively, net interest income continued to grow benefiting from loan growth and relatively stable net interest margin. Meanwhile, noninterest income was up modestly driven by higher overdraft fees and insurance income that more than offset weaker trust and asset management income. DBRS notes that mortgage banking revenues remain muted now that the refinance market has waned and the Company has been portfolioing most residential mortgage production rather than selling the loans.

Expenses were stable sequentially and remain very well managed. Reflecting positive operating leverage, the Company’s efficiency ratio improved to 57.74% from 58.38% in 2Q14.

Asset quality remains strong. Specifically, nonperforming assets declined from already low levels and net charge-offs were nominal at just 0.05% (annualized) of average loans and leases. Moreover, a specific reserve for one commercial credit was lowered. This combined with improving asset quality, resulted in a negative provision for credit losses, but the allowance for loan and lease losses remains very sound at 1.67%. With still improving asset quality trends, it is likely the allowance for loan and lease losses will continue to trend downward in the coming quarters.

Capital remains sound, especially on a risk-adjusted basis. Meanwhile, BOH continues to execute on its share repurchase program, while keeping the Tier 1 leverage ratio above its targeted 7%.

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.