Bank of Hawaii Corporation (BOH) reported its third-quarter 2012 earnings of 92 cents per share, beating the Zacks Consensus Estimate of 89 cents. However, the results were unchanged from the prior-year quarter’s earnings. Net income for the quarter was $41.2 million, down 5% from the prior-year period.
Better-than-expected results benefited from an increase in non-interest income. Moreover, the company experienced a growth in loans and deposits. Further, an improved credit quality was a positive for the quarter. Yet, the continued low interest rate environment acted as the dampener and tempered the net interest margin. A rise in expenses was also a concern.
Bank of Hawaii’s revenue came in at $156.6 million, down 2% compared to the prior-year quarter, primarily due to a decline in interest income partially offset by a rise in non-interest income. However, it surpassed the Zacks Consensus Estimate of $143.0 million.
Quarter in Detail
Bank of Hawaii’s net interest income on a taxable equivalent basis came in at $96.2 million, slipping 1% year over year. Moreover, net interest margin declined 11 basis points (bps) year over year to 2.98% in the reported quarter.
Bank of Hawaii’s non-interest income was $52.4 million, up 3% year over year. Strong mortgage banking results were partially offset by a drop in fees, exchange and other service charges and insurance income. Notably, non-interest income in the third quarter of 2011 included a $2.0 million gain associated with a contingent payment from the sale of the company’s proprietary mutual funds in 2010.
However, Bank of Hawaii’s non-interest expense inched up 1% year over year to $84.9 million. Non-interest expense, in the reported quarter, included an increase in profit sharing and incentive accruals, expenses associated with the launch of a new consumer credit card product and $1.0 million in separation costs. Further, an increase in salaries and benefits expenses, net occupancy and professional fees were partially mitigated by a decline in FDIC insurance, net equipment costs and other expenses. Notably, the non-interest expense figure in the year-ago quarter included a donation of $2.0 million to the Bank of Hawaii Foundation.
The company experienced growth in both loan balances and deposits. Loan and lease balances climbed 8% from the end of the comparable quarter last year to $5.8 billion. The hike was due to an increase in both consumer and commercial loan categories.
Moreover, deposits were $11.2 billion, up 12% year over year. The elevation in public and other deposits were partially offset by a decline in consumer and commercial deposit.
Bank of Hawaii’s credit quality metrics improved in the reported quarter. Net loans and leases charged off were $1.5 million (0.10% annualized of total average loans and leases outstanding), compared with $3.8 million (0.27%) in the prior quarter and $3.7 million (0.28%) in the year-ago quarter.
As of September 30, 2012, allowance for loan and lease losses fell to $131.0 million, from $132.4 million in the prior quarter and $143.4 million in the year-ago quarter. The ratio of the allowance for loan and lease losses to total loans and leases was 2.27%, down 7 bps sequentially and 41 bps year over year.
The long judiciary foreclosure process for residential mortgage loans continues to impact non-performing assets. As of September 30, 2012, non-performing assets as a percentage of total loans and leases and foreclosed real estate were 0.70%, down from 0.73% as of June 30, 2012 and 0.71% as of September 30, 2011.
During the reported quarter, the company did not record a provision for credit losses.
Capital ratios were mixed in the quarter. The ratio of tangible common equity to risk- weighted assets was 17.43%, compared with 17.57% at the end of the prior quarter, and 18.90% at the end of the year-ago quarter. The Tier 1 leverage ratio was 6.78%, up from
6.57% sequentially and down from 6.95% as of September 30, 2011. Tier 1 capital ratio was 16.12% in the reported quarter, down from 16.41% in the prior quarter and 17.57% in the year-ago quarter.
As of September 30, 2012, total assets at Bank of Hawaii were $13.4 billion, down 4% sequentially but edged up 1% year over year.
Capital Deployment Update
Capital deployment efforts on the part of Bank of Hawaii are encouraging. As of September 30, 2012, the company has repurchased 49.9 million shares at $36.28 per share. Following the buyback of 87,500 shares at an average price of $44.83 per share between October 1 and October 19 this year, the company currently has $80.5 million remaining under the share repurchase program, as of October 20, 2012.
Notably, in the quarter under review, Bank of Hawaii repurchased 3,12,900 shares of common stock at an average cost of $46.62 and a total cost of $14.5 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 December 14, 2012 to shareholders of record as of the close of business on November 30, 2012.
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 and net interest margin is likely to be under pressure in the upcoming quarters.
Shares of Bank of Hawaii Corporation retains a Zacks #3 Rank, which translates into a short- term Hold rating. However, one of its peers, Pacific Continental Corp. (PCBK) retains a Zacks #1 Rank (a short-term Strong Buy rating).
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