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Bank of Hawaii Leads in Earnings: Best in Class

Bank of Hawaii earns through thick and thin, and its attractive dividend is very well supported.

HONOLULU, Hawaii (


) --

Bank of Hawaii

(BOH) - Get Bank of Hawaii Corporation Report

has posted strong earnings through the credit crisis with no government assistance and is comfortably supporting an attractive dividend yield.

Shares closed at $44.64 Friday, down 2%year-to-date. Based on a quarterly payout of 45 cents a share, the dividend yield is 4.03%.

Consistently Strong Earnings

Using data provided by SNL Financial, it's clear when looking at return on average equity - based on net income before extraordinary items - that Bank of Hawaii has had the strongest earnings performance since 2005 among U.S. bank and thrift holding companies with total assets exceeding $10 billion.

Bank of Hawaii is the only large U.S. bank or thrift holding company to achieve an ROE exceeding 15% for the first half of 2010 and for each of the preceding five full years.

In fact, Bank of Hawaii's ROE has exceeded 20% for the past five full years and for the first half of 2010, except for one "bad year" in 2009 when ROE was 16.42%, second only to

IberiaBank Corp.

(IBKC) - Get IBERIABANK Corporation Report

, which had an ROE of 19.11%, in large part because SNL's income before extraordinary items included $227 million in pre-tax gains on the purchase of failed banks, including Orion Bank of Naples, Fla. and Century Bank, FSB of Sarasota, Fla. which both

failed in November

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CapitalSouth Bank

of Birmingham, Ala. which failed in August 2009.

For the first half of 2010, Bank of Hawaii's ROE led all large U.S. bank and thrift holding companies at 20.56%, way ahead of the second-place earnings performer which was

First Citizens BancShares

(FCNCA) - Get First Citizens BancShares, Inc. Class A Report

of Raleigh, N.C with an ROE of 16.32%. Rounding out the top five for the first half were

Capital One Financial

(COF) - Get Capital One Financial Corporation Report

with an ROE of 12.72%,

State Street

(STT) - Get State Street Corporation Report

at 12.06% and

TCF Financial


of Wayzata, Minn. at 11.89%. Before the credit crisis began, TCF was also very strong financial performer, with ROE exceeding 24% from 2004 through 2007. TCF was featured at the top of


list of

10 banks hurt by the overdraft "opt-in" law

, since deposit service charges comprised 25% of the company's second-quarter operating revenue.

Strong Credit Quality

Bank of Hawaii has maintained good asset quality through the credit crisis. Nonperforming assets - including loans past due 90 days or in nonaccrual status (less government-guaranteed balances) and repossessed real estate -- comprised just 0.44% of total assets as of June 30, compared to a national aggregate "noncurrent assets" ratio of 3.31% reported by the

Federal Deposit Insurance Corp

. The company's annualized ratio of net charge-offs - loan losses less recoveries - to average loans for the second quarter was 1.00%, compared to the national aggregate of 2.74%. For the current credit cycle beginning in 2008, Bank of Hawaii's peak net charge-off ratio was 1.76% in the fourth quarter of 2009.

Loan loss reserves covered 2.70% of total loans as of June 30 - way "ahead of the pace" of loan charge-offs -- and still increasing, running counter to the

reserve releases

that drive earnings improvements for many of the largest U.S. banks during the second quarter.

It's pretty clear that Bank of Hawaii's careful approach on credit has served it well, but in an interview with


, CEO Peter Ho said "I bristle at the notion that we're conservative," adding that the company simply avoided the temptation to "to take on more risk to enhance revenues."

Narrowing Spread

One trend for the bank that has run counter to industry improvement is net interest margin, which is essentially the difference between a bank's average yield on loans and investments and its average cost of funds. Bank of Hawaii reported a second-quarter net interest margin of 3.51%, declining from 3.73% a year earlier. At the same time, the aggregate net interest margin for all U.S. banks and thrifts increased to 3.81% from 3.48% a year earlier.

Buybacks and Expansion

Bank of Hawaii was able to avoid taking government bailout money through the Troubled Assets Relief Program, or TARP, because it kept earning money through the worst parts of the credit crisis. The company's dividend is well-supported by earnings, as its payout ratio of dividends declared to earnings before extra items was 46.65% for the second quarter. Regulatory capital is strong, as the company reported a Tier 1 leverage ratio of 7.09% and a total risk-based capital ratio of 18.19%, way above the 5% and 10% most banks need to be considered


by regulators.

When asked if the company was considering an increase of the dividend, Ho said Bank of Hawaii planed "to step up our share buyback" on a "reasonably tactical basis," because buybacks are a flexible way of returning capital to investors while maintaining a steady dividend. He added that the company would consider increasing the dividend over time.

When asked about the Bank of Hawaii's expansion plans, Ho said "the real growth opportunity lies in the fact that we touch nearly half the households in this state, and more than half in commercial and business banking. We are focused on doing more good things with the customers we have."


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Written by Philip van Doorn in Jupiter, Fla.

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Philip van Doorn


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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.