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Bank of Hawaii Corporation reported second-quarter 2013 earnings of 85 cents per share, beating the Zacks Consensus Estimate by a penny. However, the results were below 90 cents earned in the year-ago quarter. Net income came in at $37.8 million, down 7.3% from the year-ago quarter.

The year-over-year decline was due to a fall in net interest income and increased operating expenses, partially offset by higher non-interest income. Total deposits also declined. However, an increase in total loan balances and improvement in credit quality were the positives for the quarter. Further, capital ratios were a mixed bag.

Bank of Hawaii’s revenues were $145.4 million, down 5.1% from the prior-year quarter, primarily due to a decline in interest income, partially offset by a rise in non-interest income. However, revenues surpassed the Zacks Consensus Estimate of $138.0 million.

Quarter in Detail

Bank of Hawaii’s net interest income was recorded at $87.3 million, down 8.4% year over year. Moreover, net interest margin (NIM) declined 21 basis points (bps) year over year to 2.77%.

Non-interest income was $48.0 million, rising 2.5% year over year. The improvement reflects enhanced trust and asset management, a rise in fees, exchange and other service charges and others, partially offset by decline in Mortgage Banking, Service Charges on Deposit Accounts, Insurance and Bank-Owned Life Insurance.

The bank’s non-interest expense nudged 0.5% year over year to $81.2 million. The rise was primarily driven by an increase in salaries and benefits, professional Fees and others, partially mitigated by a decrease in net occupancy, net equipment cost, data processing expense and FDIC insurance.

Total loan and lease balances climbed 3.4% from the end of the prior-year quarter to $5.86 billion, aided by an improvement in the commercial loan portfolio, partially offset by a decline in consumer loans. Moreover, total deposits were $11.45 billion, down 1.0% year over year due to reduction in public deposits.

Credit Quality

Credit quality considerably improved during the quarter. Net loans and leases charged off were $2.3 million (0.16% annualized of total average loans and leases outstanding), compared with $3.8 million (0.27%) in the year-ago quarter.

As of Jun 30, 2013, allowance for loan and lease losses fell to $124.6 million from $132.4 million in the year-ago quarter. The ratio of allowance for loan and lease losses to total loans and leases came in at 2.13%, down 23 bps year over year.

As of Jun 30, 2013, nonperforming assets as a percentage of total loans and leases, and foreclosed real estates were 0.62%, down from 0.73% as of Jun 30, 2012.

During the reported quarter, the company did not record provision for credit losses. This was the third consecutive quarter with no provision for credit losses.

Capital Ratios

Capital ratios were a mixed bag in the quarter. The ratio of tangible common equity to risk- weighted assets was 15.65% compared with 17.57% at the end of the year-ago quarter. The Tier 1 leverage ratio was 6.95%, up from 6.57% in the year-ago quarter. Tier 1 capital ratio was 15.53% in the reported quarter, down from 16.41% in the year-ago quarter.

As of Jun 30, 2013, total assets at Bank of Hawaii were recorded at $13.73 billion, down 1.4% year over year.

Capital Deployment Update

During the reported quarter, the company repurchased 304,600 shares of common stock at an average price of $49.22 per share. Further, from Jul 1 to Jul19, the company repurchased an additional 70,000 shares of common stock at an average price of $53.51 per share.

As of Jun 30, 2013, Bank of Hawaii repurchased 50.7 million shares and returned over $1.8 billion to shareholders at an average cost of $36.44 per share. As of Jun 30, 2013, the company had 47.9 million remaining under its share repurchase program.

Bank of Hawaii’s board of directors also declared a quarterly cash dividend of 45 cents per share. The dividend will be paid on Sep 16, 2013 to shareholders of record at the close of business on Aug 30.

Our Take

We expect improvement in loan balances and the enhanced credit quality of Bank of Hawaii to serve as catalysts. Well-controlled risk management efforts are also expected to improve the company’s bottom line. Additionally, the bank’s capital deployment activities will likely raise investors’ confidence in the stock.

However, the low interest rate environment remains a matter of concern. Net interest margin is expected to be under pressure in the upcoming quarters.

Bank of Hawaii Corporation currently carries a Zacks Rank #3 (Hold). Other banks that are performing better include CoBiz Financial Inc. , Preferred Bank and Umpqua Holdings Corporation . All these stocks carry a Zacks Rank #1 (Strong Buy).

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