DBRS Comments on the Q3 2009 Earnings of Bank of Hawaii Corporation – Senior at A (low)

DBRS has today commented on the Q3 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. BOH’s quarterly performance remains very good given the operating environment. Furthermore, funding, capital and reserves were all bolstered in the quarter keeping the balance sheet strong. The Company reported net income of $36.5 million for the quarter, up from $31.0 million in the previous quarter, but down from $47.4 million in Q3 2008. The improved sequential quarter results were primarily driven by increased net interest income from higher average earning assets and margin expansion of 12 basis points (bps). Credit costs declined modestly and expense control remains solid.

Unemployment has stabilized and visitor levels have increased. However, room rates have been discounted to increase visitor traffic and consumer disposable income is under pressure from under employment from reduced work hours, so the economic environment should remain challenging. Nevertheless, the Company’s asset quality continues to outperform most banking peers.

Two commercial construction loans went to non-accrual status during the quarter causing nonperforming assets (NPAs) to increase to 0.82% of total loans and leases from 0.63% in the second quarter. Meanwhile, net charge-offs (NCOs) declined to 1.46% of average loans (annualized) from 1.65% in Q2 2009. A significant portion of charge-offs stemmed from three construction loans, which contributed $5.8 million in partial charge-offs. BOH also sold three shared national credits (SNCs) in the quarter totaling $19.5 million and incurred $4 million in charge-offs related to the sale. The SNC portfolio totaled $281 million, or approximately 5% of the total loan and lease portfolio, at the end of the second quarter. The Company considers $33 million of the SNCs as higher risk loans, including a $22 million residential construction loans. In total, the Company has $167 million in higher risk loans. This amount includes BOH’s airline leases, land loans, residential home building loans and home equity loans originated after 2004 where refreshed FICO scores are below 600 and an original LTV above 70%. DBRS notes that these exposures are manageable and in the case of the airline leases are heavily reserved against. The loan loss provision exceeded NCOs by $5.2 million increasing the reserve to a very good 2.41%. The allowance for loan and lease losses is 2.94 times NPAs.

With deposits growing and the loan portfolio contracting, BOH has invested in safe, shorter duration securities. The growth in securities has more than offset the continued decline in loan balances. The Company’s margin benefited from lower deposit costs and improved 12 bps to 3.85%. Margin expansion combined with average earning asset growth increased net interest income by $6 million, or 5.9%. Earnings were negatively impacted by a $1 million impairment on a leverage lease residual value. Overall, the Company’s return on assets was 1.21%.

Tangible common equity benefited nicely from earnings, securities appreciation and a relatively flat balance sheet. Indeed, the Company’s tangible common equity to risk-weighted assets increased to a robust 14.56% from 13.02% during the third quarter.

DBRS notes that BOH sold certain assets of its wholesale insurance business. The transaction closed on October 22 and resulted in a pre-tax gain of approximately $1.6 million, which will be in Q4 2009 results.

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.