Hawaiian banks are in a slump, but you would hardly know it.

The banks are feeling the effects of a prolonged economic downturn in the Aloha State. Yet Hawaiian banks have managed to avoid the crises that gripped their mainland cousins during recent periods of recession.

In these islands of waving palms and and gentle trade winds, there are no back-breaking burdens of bad loans, no tides of red ink, no capital melt-downs, and no crews of stern bank examiners issuing ultimatums.

As the Hawaiian economy stalls, the main impact on banks has been a slackening of their once torrid growth rates.

Clean Balance Sheets

Although loan problems have edged up, bank balance sheets are still clean by mainland standards. In fact, the credit quality of Hawaiian banks in the trough of a recession compares favorably with that of their U.S. peers in good times.

"There certainly has been a slowdown," said H. Howard Stephenson, chairman and chief executive of Bancorp Hawaii. "But we haven't had to press the panic button."

With an economic upturn in Hawaii a couple of years off, according to forecasters, more sluggishness is in store.

"Hawaiian banks will continue to perform well compared to other banks in the U.S.," said Stephen J. Paluszek, an analyst with M.A. Schapiro, New York. "They just won't do as well as they have done."

Winning Streaks Interrupted

Stagnation is a big comedown for the state's financial institutions. After years of uninterrupted growth, Hawaii's two biggest banking companies, Bancorp Hawaii and First Hawaiian Inc., broke long-standing streaks of quarterly earnings gains in 1993.

Last Thursday, Bancorp Hawaii reported third-quarter earnings of $30.1 million, 4.9% below the year-earlier net. The dip was due to a special addition to loan-loss reserves to cover a group of credits to a single commercial borrower.

The end of the boom years "has been a shock to the system," noted David McClain, a finance professor at the University, of Hawaii. Bank managers admit they are groping to adjust to leaner times.

"We were spoiled," confessed Mr. Stephenson. Said First Hawaiian president John A. Hoag: "We have had to regroup."

Return to Basics

Hawaiian bankers say they are going back to basics. Competition for consumer business has turned fiercer. That partly reflects the arrival of the first out-of-state competitor, BankAmerica Corp., which bought a local thrift last year.

BankAmerica hasn't made its weight felt much so far, local bankers say. But its mere presence has shaken up the market.

"All the banks are out with aggressive marketing campaigns," said Mr. Hoag. "And there is a much greater emphasis on sales and training."

Bancorp Hawaii and First Hawaiian have both launched major expansion campaigns, buying smaller banks and thrifts on the islands.

Hawaii is one of the last states to bar interstate banking. BankAmerica got in by acquiring a thrift. Local bankers believe the walls will come down.

"We need size and muscle," Mr. Hoag stressed. "We had to grow in-market in order to sustain the onslaught from the mainland."

Otherwise, Hawaii's two big banks are following markedly different strategies.

While First Hawaiian has focused on expanding market share in its home base, Bancorp Hawaii has built up beachheads in the Pacific islands and East Asia. It even owns a small bank in Arizona. Within five years, it would like to get 45% of its profits from these non-Hawaiian operations, Mr. Stephenson said.

Where the Action Was

Hawaii's boom of the 1980s reflected its strategic location in the middle of the Pacific Ocean. Growth on the islands was spurred by robust business activity on both sides of the Pacific Rim.

Capital from California, East Asia, and especially Japan financed resort construction and real estate development from the big island of Hawaii to Kauai 600 miles away. Pacific Rim prosperity brought floods of vacationers, fueling the state's important tourism industry.

The party ended two years ago when Japan and California fell into major recessions. Tourist traffic from Asia and North America declined. Construction activity sagged.

As a result, total employment in Hawaii fell 1.6% in the year ended in July, according to the San Francisco Federal Reserve Bank. The unemployment rate, though still low by mainland standards, edged up to nearly 5%.

Local economists say the Hawaiian economy is currently flat. Some forecasters predict modest growth in 1994; others look for a small decline. "We're not going to have any great surge until after 1996," said Bancorp Hawaii chief economist David L. Ramseur.

Despite the downturn, Hawaiian banks have remained highly profitable. Throughout the last three years, returns on assets for the state's commercial banks have hovered in a narrow and healthy range of 1.16% to 1.19%, according to the Texas-based consultancy W.C. Ferguson & Co.

Assets Decline

But assets of Hawaiian banks fell 1.2% during the first half of this year, the first drop after years of spirited growth.

Credit quality has gone from sublime to merely good. As recently as 1990, nonperforming assets represented just 0.57% of total loans and foreclosed property held by Hawaiian banks. That ratio nearly quadrupled to 2.14% by the end of 1992.

Loan problems have stabilized so far this year. The nonperforming-assets-to-loans ratio dipped back to 1.89% at the end of June.

"The loans that Hawaiian banks made were safe loans," said Clifford K. Higa, a former state banking commissioner. "That is what has allowed them to weather the storm."

At Bancorp Hawaii, the state's largest bank company with $12.5 billion of assets, annual earnings grew at double-digit levels from 1990 through 1992. In the first nine months of this year, net income grew just 2.7%.

Similarly, second-ranking First Hawaiian, with $6.4 billion of assets, has seen its profit growth rate shrink from more than 24% in 1990 to 1.2% in the first half of 1993.

Both banks have seen bad loans soar from a negligible base. Problem credits are mainly commercial loans.

Bancorp Hawaii's problem assets more than doubled in the year ended last June. But nonperforming assets still represented just 1.49% of total loans and foreclosed property at the end of the second quarter.

For its part, First Hawaiian's nonperformers reached 1.48% of loans and foreclosed property at the end of June.

|Squeaky Clean'

During the mid-1980s, First Hawaiian had virtually no bad loans on its books. "Our bank was so squeaky clean you wouldn't have believed it," said First Hawaiian's Mr. Hoag.

At that time, the only criticism regulators made was that the bank's loan portfolio was too geographically concentrated, Mr. Hoag recalled. So First Hawaiian began buying participations in mainland loans. Today, about two-thirds of the bank's bad loans are made up of credits from outside Hawaii.

Officials of the two banks admit that their loan problems could have been much worse if major Japanese banks hadn't taken over financing of major projects.

The islands are crowded with speculative resort and real estate developments that have gone belly up. But in almost all cases it is the Japanese and other outsiders who have been left holding the bag.

Local banks couldn't handle the loan amounts, nor could they match the low interest rates charged by Japanese banks. But there was something else: The aggressive underwriting of the Japanese, who focused on asset values rather than projected cash flow projections, didn't sit well with their more conservative Hawaiian colleagues.

Mr. McClain summed up the Hawaiians' cautious stance: "These banks view themselves as responsible for the state's development. They are not excessive risk takers."

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