For Bank of Hawaii Corp., call it a lesson learned.
After surviving an ill-fated expansion spree in the 1990s on the U.S. mainland and in Asia, the $10.8 billion-asset Honolulu company has largely escaped the kind of problems in subprime mortgage and residential construction lending that have afflicted many other institutions.
The coast is not entirely clear for Bank of Hawaii, but its future stands in contrast to that of one of its local competitors, the $5.4 billion-asset Central Pacific Financial Corp., which made bad real estate bets in California.
"It was painful to exit markets before, so having been through that, it was very clear in our minds that it would be too difficult to benefit our shareholders by going offshore" and competing in California, said Allan R. Landon, Bank of Hawaii's chairman and chief executive officer.
Bank of Hawaii still faces a challenging environment. Its nonperforming loans are creeping upward as tourism drops and its home state's unemployment rate rises. But its credit costs remain well below industry averages. More broadly, the company is positioned to make money through the downturn, analysts said.
In an interview last week, Landon would not speculate on his company's future performance, except to say it is prepared to handle problems stemming from the deepening recession.
"I want to be cautious, because the Hawaii economy is slowing, but in general our capital is very strong, we have healthy reserves, our earnings capacity is good — all of these things give us confidence that our bank has the resources to help our customers through the difficult times ahead," he said.
Bank of Hawaii has earned money each quarter since the recession began in December 2007, and it continues to generate profitability ratios far above those of its competitors. As of Dec. 31 its return on assets was 1.8%, compared with the average of 0.22% for commercial banks with assets of at least $10 billion, according to the Federal Deposit Insurance Corp. Its return on equity was 25.36%, compared with the average of 2.28%.
In addition, Bank of Hawaii has been one of the few U.S. banking companies to raise its dividend last year, and it rejected funding from the Treasury Department's Troubled Asset Relief Program.
The fourth-quarter provision for credit losses more than tripled from a year earlier, to $18.6 million, but noncurrent loans represented only 0.44% of total loans, well below the average of 2.97% for commercial banks with at least $10 billion of assets, according to the FDIC.
"At Bank of Hawaii we've enjoyed the benefits of being in a market that is less impacted, and right now we're trying to make sure we're well-prepared for the challenges ahead," Landon said.
Aaron J. Deer, an analyst at Sandler O'Neill & Partners LP, expects Bank of Hawaii's credit costs to increase this year, but he says it should still post profits of $2.90 a share this year and $3.10 next year. Last year its net income rose 4.6% from a year earlier, to $192.2 million, or $4.03 a share.
"I would expect them to continue to outperform other banks," he said. "I don't think they will see the kinds of problem loans that we've seen in many other banks, because they are very good at underwriting."
Brian Zabora, an analyst at Stifel, Nicolaus & Co. Inc., said Bank of Hawaii's reserves equal 8.3 times its nonperformers, compared with the average of 0.6 times for banking companies of similar size he covers in the West. Still, because of rising credit costs, he lowered his earnings estimate for this year by 48 cents, to $3.06 a share. Next year Zabora expects credit costs to decline and the company to earn $3.30.
Deer said Bank of Hawaii has fared better than many other institutions, because it has "stuck to its knitting" and focused mainly on business in its home state.
Bank of Hawaii has not always been so conservative. In the 1990s the company, then named Bancorp Hawaii Inc., bought banks or branches in California, Arizona and Guam and forged alliances with financial institutions in the South Pacific and Asia. In 1997 it renamed itself Pacific Century Financial Corp. to reflect its broadened strategy. After becoming saddled with losses from its far-flung ventures, in 2000 the company brought in the turnaround veteran Michael E. O'Neill, who had been the chief financial officer of BankAmerica Corp.
Under O'Neill, the company divested most of its out-of-state operations. (Bank of Hawaii still has nine branches in Guam, American Samoa and other South Pacific islands). In 2001 it took its current name to demonstrate its renewed focused on its local market.
Landon came to the company in 2000 as director of risk management. He then was promoted to chief financial officer and later to president and chief operating officer. He became the CEO in 2004, after O'Neill retired.
Bank of Hawaii's problems related to its aggressive acquisition strategy in the 1990s deterred the company's board from trying to exploit the latest housing boom in California, Landon said.
"We are a company that's now focused on risk management," he said. "So when we saw competitors coming into the marketplace with a whole genre of 'creative' subprime mortgage products for borrowers who would be challenged to repay, we just stayed away, because that didn't seem to be a profitable business for us."
Brett Rabatin, an analyst at Sterne, Agee & Leach Inc., said Bank of Hawaii's newfound prudence should enable it to remain profitable while loan demand slows.
Roughly half of its $8.3 billion of deposits consist of low-cost demand deposits and money market accounts, keeping the costs of funds low (1.37% at Dec. 31) and margins high (4.51%). For commercial banks with $10 billion or more of assets, the average cost of funds as of Dec. 31 was 2.03%, while the average net interest margin was 3.09%, according to the FDIC.
"I think you'll see them continue to fare much better than 99% of the banks in the U.S.," Rabatin said.