DBRS Comments on the Q1 Earnings of Bank of Hawaii Corporation – Senior at A (low)

DBRS has today commented on the Q1 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 $36.0 million for the quarter, down from $39.3 million in the previous quarter and $57.2 million in Q1 2008. On a sequential quarter basis, strong mortgage banking results and a $10 million pre-tax gain related to the sale of the Company’s equity interests in two leveraged leases were more than offset by significant margin pressure, higher loan loss provisioning and a $1.5 million legal contingency reserve. DBRS notes that BOH grew average deposits by a very robust 13% during the quarter augmenting its already strong liquidity profile. A healthy and liquid balance sheet, still solid profitability and a conservative loan loss reserve of 2.12% position BOH to continue generating operating results and maintaining credit fundamentals expected of banks in its rating range.

The weakening economy contributed to higher levels on nonperforming assets (NPAs) and net charge-offs (NCOs) during the quarter, but asset quality metrics still compare favorably to those of peers. In Q1 2009, one large loan to a national mall owner, one large residential mortgage and four land loans that went to non-accrual status were the primary drivers for the increase in NPAs. Specifically, NPAs increased to 0.64% of loans and leases in the first quarter compared with 0.23% in the previous quarter and 0.09% in Q1 2008. Meanwhile, NCOs increased to 0.88% of average loans and leases from 0.64% in the fourth quarter, primarily led by higher home equity and C&I charge-offs including $3 million related to the national mall owner. Given the economic slowdown, BOH provisioned an incremental $10.9 million more than NCOs causing the loan loss reserve to improve to 2.12% of total loans and leases. With higher unemployment, declining real estate values and lower visitor levels, DBRS expects further erosion in asset quality at the Company.

For the second consecutive quarter, BOH saw exceptional deposit growth as the Company benefits from a flight to quality and attractive in-market deposit rates. Specifically, all deposit categories except for time deposits had higher balances. With the loan portfolio shrinking, the excess funding was deployed into Treasury securities and funds sold to the Federal Reserve. With this conservative balance sheet positioning, the Company’s net interest margin (NIM) came under pressure contracting 67 basis points to 3.76% during the quarter. BOH has reduced deposit pricing and will most likely buy some longer duration securities, which should help NIM.

Balance sheet growth pressured capital metrics, but capital remains solid. As a result, the Company’s Tier 1 leverage declined to 6.94% from 7.30% during the quarter. However, pointing to the low-risk assets added to the balance sheet during the quarter, the tangible common equity to risk-weighted assets improved 119 basis points to 12.47%. BOH remains focused on controlling risks and maintaining a strong balance sheet during the economic 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.