The stories of Bank of Hawaii Corp. and Central Pacific Financial Corp. tell you everything you need to know about the troubled past and hopeful signs for the future of banking in Hawaii.
The state's largest banks had been headed in opposite directions until the first quarter, when the perceived laggard (Central Pacific) hit its stride and both banks beat market expectations.
The $13 billion-asset Bank of Hawaii, which remained profitable throughout the recession, reported a 4% increase in earnings from a quarter earlier, to $42.4 million. Meanwhile, the $4 billion-asset Central Pacific, which spent the past two years in the red, managed to report earnings of $4.6 million.
Both companies share a common philosophy: neither is likely to expand to the mainland again. More conservative strategies, coupled with an improving local economy, have made these and other Hawaiian banks cautiously upbeat.
"We want to go back to our roots," said John Dean, Central Pacific's president and chief executive. "There's nothing wrong with being a homegrown community bank."
When Dean came out of retirement in March 2010 to help turn around Central Pacific, the company was hemorrhaging from loan losses, largely related to construction and land development in mainland states such as California. The company lost about $700 million the last three years and has incurred more than half a billion dollars of credit losses.
Dean said Central Pacific's biggest mistake was entering the mainland roughly a decade ago, as it pursued robust loan growth right before the collapse of the real estate market.
Bank of Hawaii, under another management team, had taken a similar path to growth a few years earlier. But learning its lesson from severe losses, the company has left those markets and continues to outperform its peers nationwide even though Hawaii is not known for its banking prowess.
"Hawaii is not necessarily the fastest-growing market, but it's been a good, healthy market," said Aaron James Deer, an analyst at Sandler O'Neill & Partners LP. "Deposit costs are fairly lower because they don't have the competition like in the mainland."
Despite the state's small, nine-bank market and tepid loan growth, the area has proven sustainable to its local players.
Hawaii's unemployment rate, for instance, was 6.3% in March, compared with the national rate of 8.8%, according to data from the Bureau of Labor Statistics.
The state "went into the downturn with a very low unemployment rate, around 3%, but it is still significantly below the unemployment rate here in the mainland," Deer said.
Still, Hawaii is heavily dependent on the fickle industries of tourism and real estate, which helps explain elevated levels of nonperforming assets. Among the six Honolulu banks that have reported first-quarter results, the median ratio of nonperforming assets to total assets ratio was 3.3%. The national median was 1.8% at March 31, according to FBR Capital Markets & Co. (The data excluded thrift companies.)
Central Pacific had the second-highest ratio among that group, at 13.1%. It was down from 17.1% a year earlier.
Central Pacific's net income was a significant reversal from its $160.2 million loss a year earlier. It reported a loss of $2.1 million in the fourth quarter.
"I wasn't expecting them to become profitable yet. … I had expected more so for it to occur in the third quarter," said Joe Gladue, an analyst at B. Riley & Co.
Dean said he did not expect the company to turn a profit so quickly, either.
Lower credit costs and a reduced loan-loss provision were the main reasons for the improvement. The bank's biggest lift came from a $325 million private placement led by Carlyle Group and Anchorage Capital Group LLC that closed in February.
Last week the company also oversubscribed its $20 million rights offering to existing shareholders in connection with the private placement.
On May 12, regulators lifted a long-standing consent order against the bank, replacing it with a memorandum of understanding.
During the last two years, the company reduced its loan portfolio from the Western states to less than $300 million, from its peak of $1.2 billion.
Central Pacific's total loan portfolio is likely to continue shrinking for the next four to eight quarters as the bank rebalances its concentration in construction loans, Dean said.
Bank of Hawaii's chief executive, Peter Ho, said its improvement stems from changes made a few years ago.
"The decision you make with banks four years ago impacts you three years later," Ho said. "We are beginning to see the benefit of the reasonable conservative underwriting decisions we made three years ago."
The company's nonperforming assets fell nearly 17%, to $34.6 million or 0.65% of total assets, from a year earlier. Because of this, Bank of Hawaii lowered its provision, which in turn lifted earnings.
In the 1990s, "Bank of Hawaii had gone through a very troubling period as a result of having expanded into markets that were considerably away from the home market," Deer said.
The company "took on a much more conservative profile in 2000, so when the bank was hit with headwinds, these guys maintained a very cautious stance," Deer said. "On top of that, it's a really well-run bank in that it has sustained profitability and has been able to continuously build [its] capital levels."
Ho said since the 1980s, the only time the bank has underperformed against the Standard & Poor's index was during a five-year period in the 1990s when it expanded away from its home base.
Now, about 90% of the company's loan portfolio is in Hawaii, with the rest in Guam.
On the flip side, Hawaii's isolation from the Western states leaves room for expansion. Out-of-state banks that tried to expand there, such as Bank of America Corp., encountered difficulties.
"The industry recognizes that Hawaii is a challenging place to do business," Ho said. "Hawaii is a unique culture. It's the most ethnically diverse state in the country in many ways … and there is not much of a transient market like in Western states."
Now that Bank of Hawaii is primarily focused on its hometown, Ho said, it wants to improve cross-selling to its current customer base, which serves one of every two homes in the state.
"The challenge now is how do you create value in perhaps a different way than the industry has been used to," Ho said.
"We used to think when things were great, 'Let's pour on loan volume,' which is important, but there are greater opportunities for organic growth with our existing customer base."