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Bank of Hawaii Beats on Both Lines

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Bank of Hawaii Corporation (BOH - Free Report) reported its fourth-quarter 2012 earnings of 90 cents per share, beating the Zacks Consensus Estimate just by a penny. Moreover, the results compare favorably with the prior-year quarter’s earnings of 85 cents. Net income for the quarter came in at $40.3 million, up 3% from the year-ago period.

Better-than-expected results benefited from an increase in non-interest income, rise in loans and deposits as well as a drop in expenses. Yet, the continued low interest rate environment acted as the dampener, affecting the net interest margin as well as the net interest income.

For full year 2012, net income stood at $166.1 million or $3.68 per share, compared with $160.0 million or $3.40 in 2011. This also compared favorably with the Zacks Consensus Estimate of $3.66 per share.

Bank of Hawaii’s revenue reached $153.7 million, up 2% compared with the prior-year quarter, primarily due to a rise in non-interest income, partially offset by a decline in interest income. Moreover, it surpassed the Zacks Consensus Estimate of $144.0 million.

For the full year, the company’s revenues came in at $620.8 million, down 3% from 2011. However, it compares favorably with the Zacks Consensus Estimate of $572.0 million.

Quarter in Detail

Bank of Hawaii’s net interest income was recorded at $90.3 million, down 4% year over year. Moreover, net interest margin declined 11 basis points (bps) year over year to 2.87%.

Non-interest income reached $53.0 million, up 22% year over year, primarily due to strong mortgage banking revenues.

The bank’s non-interest expense inched down 1% year over year to $83.5 million. Non-interest expense in the fourth quarter of 2012 included total charges of $1.5 million related to the company’s previously announced plans to close down 2 branches in American Samoa.

Further, a decline in FDIC insurance, net equipment costs and other expenses were partly offset by an increase in salaries and benefits expenses, net occupancy and professional fees.

The company experienced improvements in both loan balances and deposits. Total loan and lease balances climbed 6% from the end of the prior-year quarter to $5.7 billion. Moreover, deposits were $11.5 billion, up 9% year over year.

Credit Quality

Bank of Hawaii’s credit quality metrics were a mixed bag in the reported quarter. Net loans and leases charged off were $2.1 million (0.15% annualized of total average loans and leases outstanding), compared with $1.5 million (0.10%) in the prior quarter and $7.0 million (0.51%) in the year-ago quarter.

As of Dec 31, 2012, allowance for loan and lease losses fell to $128.9 million from $131.0 million in the prior quarter and $138.6 million in the year-ago quarter. The ratio of allowance for loan and lease losses to total loans and leases arrived at 2.20%, down 7 bps sequentially and 30 bps year over year.

As of Dec 31, 2012, non-performing assets as a percentage of total loans and leases, and foreclosed real estate were 0.63%, down from 0.70% as of Sep 30, 2012 and 0.74% as of Dec 30, 2011.

During the reported quarter, the company did not record a provision for credit losses. This was the second consecutive quarter of no provision for credit losses.

Capital Ratios

Capital ratios were mixed in the quarter. The ratio of tangible common equity to risk- weighted assets was 17.24%, compared with 17.43% at the end of the prior quarter and 17.93% at the end of the year-ago quarter. The Tier 1 leverage ratio stood at 6.83%, up 6.78% sequentially and 6.73% year over year. Tier 1 capital ratio was 16.13% in the reported quarter, up from 16.12% in the prior quarter but down from 16.68% in the year-ago quarter.

As of Dec 31, 2012, total assets at Bank of Hawaii were recorded at $13.7 billion, up 3% sequentially but marginally down by 1% year over year.

Capital Deployment Update

Bank of Hawaii’s capital deployment efforts were encouraging. As of Dec 31, 2012, the company repurchased 33.9 million shares at $44.06 per share. Following the buyback of 34,000 shares at an average price of $46.60 per share between Jan 2 and Jan 25 this year, the company currently has $67.9 million remaining under the share repurchase program as of Jan 25, 2013.

Bank of Hawaii’s board also declared a quarterly cash dividend of 45 cents per share. It will be paid on Mar 14, 2013 to shareholders of record at the close of business on Feb 28, 2013.

Our Take

We believe that the improvement in loan balances and deposits at Bank of Hawaii will serve as a positive catalyst. Well-controlled risk management efforts are also expected to improve its bottom line. Additionally, the company’s capital deployment activities raise investors’ confidence in the stock.

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

Shares of Bank of Hawaii Corporation retain a Zacks Rank #4 (Sell). Other West Banks that are performing well include, Western Alliance Bancorporation (WAL - Free Report) , Central Valley Community Bancorp (CVCY - Free Report) , and Columbia Banking System Inc. (COLB - Free Report) . All these stocks carry a Zacks Rank #1 (Strong Buy).


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