DBRS: Bank of Hawaii Generates Positive Core Operating Leverage in 2Q; Strong Loan Growth

Summary:
• Reported net income of $41.2 million was down modestly reflecting the absence of Visa sale share gains.
• Highlights of the quarter include strong loan growth and positive core operating leverage.
• 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) 2Q15 results positively with continued loan growth and positive core operating leverage sequentially. Indeed, core revenues increased, while core expenses declined. Moreover, the balance sheet remains a source of strength with pristine asset quality and sound capital. DBRS notes that both visitor spending and visitor arrivals in the first five months of 2015 exceeded last year’s record numbers.

Excluding securities gains, BOH’s total revenues increased over 3% primarily reflecting higher net interest income, improved mortgage banking revenues, as well as higher seasonal trust and tax service revenue. Loan growth remains broad-based and the margin was stable sequentially. During the quarter, the Company once again started selling residential mortgages, which contributed to better mortgage banking results. BOH noted that it anticipates further mortgage sales, but gains may not be as robust in coming quarters. Meanwhile, expenses were down following seasonally higher 1Q expenses.

Asset quality is pristine with very low levels of nonperforming assets and net charge-offs. As a result, BOH did not record a provision for credit losses. DBRS notes that at 1.43%, the allowance for loan and lease losses is now near pre-crisis levels and that loan growth has been robust, so BOH may have to increase provisioning levels soon reflecting loan growth, not credit deterioration.

Even with the robust loan growth, core deposits still easily fund the loan portfolio. Overall, BOH remains asset sensitive and the Company noted that a 200 basis point increase in interest rates would result in a 5% increase in net interest income over the first year. Meanwhile, the duration of the investment securities portfolio was a manageable 3.46 years.

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.