DBRS Comments on the Q2 2009 Earnings of Bank of Hawaii Corporation – Senior at A (low)

DBRS has today commented on the Q2 2009 earnings of Bank of Hawaii Corporation (BOH or the Company). DBRS rates the Company’s Issuer & Senior Debt at A (low) with a Stable trend. Even with the recession, BOH continues to deliver solid operating results. The Company reported net income of $31.0 million for the quarter, down from $36.0 million in the previous quarter and $48.3 million in Q2 2008. On a sequential quarter basis, higher net interest income, a $1.6 million income tax benefit and solid core expense control were more than offset by incremental loan loss provisioning of $3.8 million, higher FDIC assessments (including a $5.7 million special assessment) and lower noninterest income (BOH sold one equity interest in a leveraged lease for a $2.8 million gain this quarter compared to a $10 million pre-tax gain related to the sale of the Company’s equity interests in two leveraged leases in Q1 2009). Earning assets increased significantly even with continued loan balance declines as the Company grew its securities portfolio. With still solid earnings, a healthy and liquid balance sheet, DBRS believes BOH will continue generating operating results and maintaining credit fundamentals expected of banks in its rating range.

Asset quality remains under pressure, but the Company continues to compare favorably to other banks in terms of overall levels of nonperforming assets (NPAs) and net charge-offs (NCOs). During the quarter, BOH had three major loan transactions that contributed a combined $13.6 million in NCOs and to a small reduction in NPAs. Specifically, BOH sold a large non-accrual loan made to a mall owner, wrote down the carrying value of a shared national credit that has been subsequently sold and restructured a leverage lease that involved a bankrupt auto manufacturer. The resolution of the loan to the mall owner caused NPAs to decline modestly to $39.1 million, or 0.63% of total loans leases and foreclosed real estate, from $40.3 million, or 0.64%, in the first quarter. The decline in commercial NPAs was offset by an increase in consumer related land loans, second homes and investor properties on neighbor islands. The Company’s remaining exposures to these asset classes remains manageable. With the three large loan resolutions, NCOs jumped to $25.7 million, or 1.65% of average loans and leases (annualized), from $14.0 million, or 0.88%, in the first quarter. Management is concerned about one $8.3 million aircraft lease, but does not see any other large potential problem loans that could impact Q3 2009 results. Nevertheless, the Company will continue to look at opportunities to sell syndicated credits that show signs of trouble if BOH can do so at a modest loss. DBRS notes that the loan loss reserve remains strong at 2.23% of total loans and leases. While there have been some promising signs, unemployment has yet to stabilize and visitor levels and spending remain down in Hawaii relative to last year, so DBRS expects further erosion in asset quality at the Company.

While the Company did see public deposit seasonality drive down overall period-end deposits, deposit growth remained strong on the consumer and commercial side. With the loan portfolio declining, the robust deposit growth has been invested in securities. Indeed, the securities portfolio increased almost $1.2 billion and resulted in earnings asset growth and higher net interest income for the quarter. DBRS notes that BOH has remained conservative by buying mostly treasuries and government agency securities. The average duration of the portfolio remains relatively short at 2.4 years. This balance sheet growth has caused the tangible common equity to total assets ratio to decline 32 basis points (bps) during the quarter to a still solid 6.65%. Showing the lower risk nature of the securities, the tangible common equity to risk-weighted assets increased 55 bps to 13.02%.

BOH remains well positioned to continue to navigate the difficult operating environment and has been one of the best performing banks in our rated universe during the recession.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.