DBRS Comments on Q4 Earnings of Bank of Hawaii Corporation – Senior at A (low)

DBRS has today commented on the Q4 2008 earnings of Bank of Hawaii Corporation (BOH or the Company), given the continued unsettled conditions in the financial markets and a slowing Hawaiian economy. DBRS rates the Company’s Issuer & Senior Debt at A (low) with a Stable trend. Despite the economic slowdown, BOH continues to report very solid financial results, while maintaining strong credit fundamentals. Indeed, the Company reported net income of $39.3 million for the quarter, down from $47.4 million in the previous quarter and $40.9 million in Q4 2007. Excluding an $8.9 million net credit related to a pending resolution of Sale In/Lease Out (SILO) leases with the Internal Revenue Service taken in Q3 2008, net income would have modestly increased on a sequential quarter basis. Other Q4 2008 highlights include net interest margin expansion of ten basis points, robust deposit growth, a net $4.5 million reduction in the accounting fair value of mortgage servicing rights, lower trust and asset management fees and very good expense control. Overall, BOH remains very well positioned to navigate through this very challenging economic downturn.

Even though non-performing assets (NPAs) more than doubled during the quarter, asset quality remains strong on an absolute basis. Indeed, NPAs remained low at 0.23% of loans and leases in the fourth quarter compared with 0.09% in the previous quarter and 0.08% in Q4 2007. The increase can be primarily attributed to one construction loan on the mainland and two commercial loans in Hawaii that went to non-accrual status during the quarter. Meanwhile, net charge-offs (NCOs) increased to 0.64% of average loans and leases from 0.45% in the third quarter. The increase in NCOs was primarily related to construction, commercial & industrial and indirect auto loans. DBRS notes that the land portfolio was most problematic in 2008 and the remaining exposure on this portfolio is a very manageable $55.2 million. Other potential problem areas include the Company’s $154 million construction portfolio and $79.7 million airline exposure. DBRS notes that the airline portfolio is still performing and BOH already has specific reserves of $30.7 million against the exposure. Loan loss provisioning exceeded NCOs by $8 million, which built the reserve to a strong 1.89% of total loans and leases. With higher unemployment and lower visitor levels, DBRS expects further erosion in asset quality.

Positively, the Company saw deposit balances grow across most categories during the quarter. Overall, BOH attracted $634 million in deposits, including approximately 1,600 net new deposit accounts. The Company has benefited from attractive products and a flight to quality as the balance sheet remains healthy.

In December, BOH announced that it would not participate in the U.S. Treasury’s (the Treasury) Capital Purchase Program. With ample resources to meet client needs and to invest in the franchise, the Company believed it was not in the shareholder’s best interests to participate. While 1,000 shares were repurchased during Q4 2008, the Company has not repurchased any shares in January and will likely continue to build capital given the uncertain and difficult operating environment. Even without the Treasury investment, capital levels remain solid, as evidenced by the Company’s Tier 1 leverage of 7.30%.

Given the Company’s strong market position in Hawaii, sufficiently diverse revenues and a healthy balance sheet, DBRS expects BOH to continue generating operating results and maintaining credit fundamentals expected of banks in its rating range.

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.