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Top Bank: 'Bankoh' Shows Peers How It's Done

How much better is Bank of Hawaii performing than most of its competitors? Some numbers: The average return on equity over the last 12 months for banks with at least $10 billion in assets is roughly minus 5 percent, according to data from Capital IQ; B of H's ROE is 19.1 percent. The average return on assets for the segment is minus 0.2 percent; B of H's ROA is 1.4 percent. Average net income is minus 5.8 percent; B of H's is 27.5 percent. Over the last two years, revenues for banks of this size have fallen an average of nearly 9 percent; B of H's have fallen only 4.7 percent. Historically, the $12.2 billion-asset company's earning per share has grown at a clip of more than 10 percent annually.

The long-term picture is even prettier. As the chart below illustrates, "Bankoh," as the locals call it, has been profitable for two decades (maybe longer -- I only went back until 1988). Equally impressive, the company has for years adeptly trimmed costs as its financial fortunes dictate (the purple line charts total non-interest expenses).

What's the secret? Nothing fancy. Instead of swinging for the fences to please shareholders, the company has emphasized steady growth, focusing on its home market after learning its lessons from a misguided expansion plan outside of Hawaii during the 1990s. Roughly half of its deposits are in checking and money-market accounts, which keeps its cost of funds low. In investment terms, it has observed a straightforward doctrine: keep the cost of equity capital below that of expected returns on equity. Bank analysts also like B of H because it has moved aggressively to shore up its capital reserves during the financial crisis to offset problem loans.

Oh, and not putting your foot in it helps. Unlike many banks, including local rivals, B of H deftly avoided the subprime mortgage and residential construction lending mess. Its rate of nonperforming loans relative to total assets -- a gauge of how wise a bank is in its lending -- is 0.3%, well below the industry norm these days.

Not that B of H, which provides retail and commercial banking, investment, and treasury services, hasn't felt the sting of the recession. For the first half of the year, net income was $67 million, down from $105.5 million in the year-ago period. Diluted EPS was $1.40, versus $2.18 for the first half of 2008. Although the company's loan portfolio has remained comparatively healthy, it has had to quadruple its provision for credit losses.

The main problem is Hawaii's weakening economy. Although the state has seen fewer job losses than in many other parts of the country, tourism has declined, while construction also has fallen off. Despite these challenges, B of H has remained profitable ever since the financial crisis began in late 2007 and has continued to pay quarterly cash dividends throughout the meltdown. Things also are looking up on the credit front, with B of H's level of non-performing assets inching down from the previous quarter.

"We plan to maintain our strong liquidity, reserve and capital, all important measures of soundness," said B of A CEO Allan Landon in a July 27 call with analysts to discuss its second-quarter results. "Where we can do so, we will exit loans that have higher uncertainty. We remain focused on controlling risks and expense. Bank of Hawaii is safe, balanced and prepared for opportunities in the future."

Old-school advice that other banks would be wise to emulate.

Chart of Bank of Hawaii's financial results courtesy of Capital IQ.