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Bank of Hawaii Tops Zacks Estimate

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Aided by a decrease in provision for credit losses, Bank of Hawaii Corporation (BOH - Free Report) reported second-quarter 2012 earnings of 90 cents per share, surpassing the Zacks Consensus Estimate of 86 cents. The results were also above the prior-year quarter’s earnings of 74 cents per share. Net income for the quarter was $40.7 million, up 16% from the prior year period.

Moreover, quarterly results of Bank of Hawaii benefited from a decrease in expenses. The company experienced a growth in loans and deposits. Yet, the continued low interest rate environment acted as the dampener and tempered net interest margin. However, the company has augmented its share buyback authorization by an additional $75 million and this is impressive.

Quarter in Detail

Bank of Hawaii’s net interest income on a taxable equivalent basis came in at $97.9 million, essentially flat year over year. The company experienced growth in both loan balances and deposits.

Loan and lease balances advanced 6% from the end of the comparable quarter last year to $5.7 billion. Deposits were strong at $11.5 billion, up 16% year over year.

However, continuing low interest rates led to an 8 basis point (bp) sequential and 18 bp year-over-year decline in net interest margin which came at 2.98% in the reported quarter.

Bank of Hawaii’s non-interest income was $46.8 million, down 5% year over year. While mortgage banking results were strong, a drop in fees, exchange, and other service charges, insurance as well as other income primarily pulled the non-interest income figure down in the quarter.

However, Bank of Hawaii’s non-interest expense fell 14% year over year to $80.7 million. Notably, the non-interest expense figure in the year-ago quarter included a litigation settlement of $9.0 million for overdraft related claims. Moreover, the company experienced a decrease in salary and benefits expenses as well as in net occupancy costs.

Credit Quality

Credit quality metrics were mixed in the reported quarter at Bank of Hawaii. Net loans and leases charged off were $3.8 million (0.27% annualized of total average loans and leases outstanding), compared with $3.4 million (0.24%) in the prior quarter and $6.0 million (0.45%) in the year-ago quarter.

As of June 30, 2012, allowance for loan and lease losses fell to $132.4 million, from $135.6 million in the prior quarter and $145.0 million in the year-ago quarter. The ratio of the allowance for loan and lease losses to total loans and leases was 2.34%, down 8 bps sequentially and 37 bps year over year, reflecting improvements in credit quality and Hawaii economy on the whole.

The long judiciary foreclosure process for residential mortgage loans continues to impact non-performing assets. As of June 30, 2012, non-performing assets as a percentage of total loans and leases and foreclosed real estate were 0.73%, down slightly from 0.74% as of March 31, 2012 and up from 0.64% as of June 30, 2011.

Provision for credit losses were $0.6 million in the reported quarter, compared with $0.4 million in the prior quarter and $3.6 million in the year-ago quarter.

Capital Ratios

Capital ratios were mixed in the quarter. The ratio of tangible common equity to risk-weighted assets was 17.57%, compared with 17.62% at the end of the prior quarter, and 18.95% at the end of the year-ago quarter. The Tier 1 leverage ratio was 6.57%, unchanged sequentially and down from 7.07% as of June 30, 2011. Tier 1 capital ratio was 16.41% in the reported quarter, down from 16.50% in the prior quarter and 17.96% in the year-ago quarter.

As June 30, 2012, total assets at Bank of Hawaii were $13.92 billion, up 1% sequentially and 6% year over year.

Capital Deployment Update

Capital deployment efforts on part of Bank of Hawaii are encouraging. Its board of directors increased the share buyback authorization by an additional $75 million. Together with the prior announced authorization, the total buyback authority stood at $1.90 billion. Following 70 thousand share buybacks at $46.10 per share between July 2 and July 20, the company currently has $95.8 million remaining as of July 20, 2012.

Notably, during the reported quarter, Bank of Hawaii bought back 424.9 thousand shares of common stock at an average cost of $46.97 and a total cost of $20.0 million under its share repurchase program.

Bank of Hawaii’s board also declared a quarterly cash dividend of 45 cents per share. It will be paid on September 17, 2012 to shareholders of record as of the close of business on August 31.

Our Take

We believe that growth in loans balances and deposits at Bank of Hawaii serve as a positive catalyst. Well-controlled expenses and risk management efforts are also expected to improve its bottom line. Additionally, an increase in share buyback authorization gives a boost to investors’ confidence.

A regional financial services company, Bank of Hawaii Corp., serves businesses, consumers and governments in Hawaii, American Samoa and the West Pacific. Notably, with continued improvement in tourism, Hawaii’s largest industry, its economy was stable in the quarter.

Yet, a low interest environment remains our concern and net interest margin is likely to be under pressure in the upcoming quarters.

Shares of Bank of Hawaii Corp. retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation. However, its peers such as CoBiz Financial Inc. (COBZ - Free Report) and Central Pacific Financial Corp. (CPF - Free Report) retain a Zacks #2 Rank, which represents a short-term ‘Buy’ recommendation. 

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