DBRS: Bank of Hawaii 3Q15 Results Solid; Aircraft Lease Impairment: QoQ Avg Loan & Deposit Growth

Summary:
• The Company reported net income of $34.3 million for 3Q15, down from $41.2 million for 2Q15, mostly reflecting 3Q15 aircraft lease impairment charges related to the disposal of its remaining aircraft leases.
• Highlights of the quarter include solid average loan and deposit growth, and pristine asset quality.
• 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) 3Q15 results as solid, despite lower sequential earnings mostly driven by one-time impairment charges related to the Company’s decision to dispose of its remaining aircraft leases. Overall, BOH’s balance sheet fundamentals remain strong, exhibiting solid sequential average loan and deposit growth, pristine asset quality and strong capital. Finally, BOH continues to benefit from the good Hawaiian economy, underpinned by low unemployment, a solid real estate market, and the healthy tourism industry.

Excluding one-time items, including the estimated loss related to the pending sale of aircraft, BOH’s adjusted total revenue decreased 1%, quarter-over-quarter (QoQ), as slightly higher spread income was more than offset by a decline in adjusted non-interest income. Improved sequential spread income reflected average loan growth of 3.4%, driven by higher levels of residential mortgage loans, commercial mortgage exposures, and home equity loans. Meanwhile, lower fee income primarily reflected a decrease in bank owned life insurance and lower trust and asset management fees. Finally, expenses remain well managed. Specifically, excluding non-core items, including the residual value impairment on aircraft in which leases have matured, expenses were slightly down sequentially.

Asset quality remains pristine with very low levels of nonperforming assets and net charge-offs. As a result, BOH did not record a provision for credit losses. At 1.35%, the allowance for loan and lease losses is now at pre-crisis levels. As such, BOH may have to increase provisioning levels soon, reflecting loan growth not credit deterioration.

Even with solid loan growth, core deposits still easily fund the loan portfolio. Furthermore, the Company’s strong liquidity profile reflects its large good quality securities book, which has a manageable average duration of 3.37 years. Finally, despite repurchasing $14.5 million of common shares, capital remains strong, as evidenced by BOH’s Basel III Common Equity Tier 1 capital ratio of 14.11%.

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.