DBRS Comments on Bank of Hawaii Corporation’s Q4 2009 Earnings – Senior at A (low)

DBRS has today commented on the Q4 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. The Company reported net income of $40.5 million for the quarter, up from $36.5 million in the previous quarter and from $39.3 million in Q4 2008. On a sequential quarter basis, higher net investment securities gains and several other one-time gains more than offset a decline in net interest income and higher expenses resulting in a return on assets of 1.31%. Asset quality remains better than most banking peers and deposit growth remained strong. With weak loan demand, the Company has been investing excess funding into shorter duration, lower risk securities, which has pressured the net interest margin (NIM). While Q4 2009 earnings benefited from several one-time items, which boosted pre-tax income by $29.3 million, DBRS views the results as solid and expects BOH to continue generating operating results and maintaining credit fundamentals expected of banks within its rating range. DBRS notes that the Company has remained solidly profitable throughout the entire economic downturn, however growth prospects should remain challenging.

Credit quality appears to have stabilized and continues to outperform most banking peers. Indeed, nonperforming assets (NPAs) reached $48.3 million, or only 0.84% of total loans and leases, from 0.82% in the third quarter. Commercial NPAs declined from charge-offs and the transfer of a $2.8 million construction loan to foreclosed real estate, while consumer NPAs increased $4.6 million from residential real estate-related loans. Meanwhile, net charge-offs (NCOs) increased $3.5 million to $25.8 million, or 1.75% of average loans (annualized) from 1.46% in the third quarter. NCOs included a $9.4 million charge related to a leveraged lease for an airline that went bankrupt as well as three construction loans that were partially charged off. During the quarter, the allowance for loan losses was bolstered by $1 million and now represents a strong 2.49% of total loans and leases. Positively, visitor traffic has picked up and the Hawaiian unemployment rate has improved as well. Nonetheless, management does not expect a broad-based economic recovery in 2010 and will continue to focus on soundness.

During the quarter, BOH repositioned the investment portfolio harvesting $25.7 million in net gains even with an $11 million loss related to selling all remaining exposure to private label mortgage securities. Meanwhile, average deposits grew another 2.1% to $9.3 billion. The Company has reinvested excess funding into low risk, shorter duration assets like Treasuries and Ginnie Mae securities. The sale of the higher yielding private label securities combined with lackluster loan (loans contracted again even with a $47.5 million commercial real estate loan purchase) demand has pressured NIM, which contracted 28 basis points to 3.57%. DBRS notes that the average duration of the securities portfolio was 2.91 years.

With the better than expected quarterly results stemming from the securities gains, BOH took $6.1 million in compensation accruals and donated $1 million to charity. These actions increased non-interest expenses by 5.4% to $88.5 million compared to Q3 2009. Excluding the one-time items, expenses would have declined 3.1%. Overall, the Company has done a good job managing expenses.

Capital remains solid, particularly on a risk-adjusted basis. Indeed, BOH’s tangible common equity to risk-weighted assets ratio improved to 15.45% from 14.56% evidencing the lower risk securities being added to the securities portfolio.

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.