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How Bank of Hawaii hit the top

Loan growth, cheap deposits, cost control all help

How Bank of Hawaii hit the top

Hawaii has long turned its wealth of sunshine into economic power through tourism, but for Peter Ho, it’s also a source of literal power. Electricity comes dearly in the remote island state. Last year Bank of Hawaii installed 400 solar panels on its headquarters roof, and in time Ho, chairman, president, and CEO, says the company expects to save $50,000 annually on electrical bills.

Expense control, part of what put Bank of Hawaii at the top of the ABA BJ rankings, “is a way of life here,” says Ho. “We don’t do things with campaigns driven by consultants—that’s just not our style.”

Nor is Ho a believer in the much-vaunted efficiency ratio, as he’s not sold on its significance. The bank just keeps looking for places to contain or cut costs. Asked for examples, Ho points to increasing use of virtualization in the $14.1 billion-assets company’s IT department; technology upgrades in its branch system, Hawaii’s largest; and space-saving reconfigurations of bank premises that enable the bank to turn excess footprint into commercial space to be leased to other businesses.

Bank of Hawaii’s success comes from more than expense control. A combination of good loan growth (4.1% overall), especially in commercial real estate (14%) and C&I lending (10%); a relatively strong state economy, notably its tourism industry; a strong and inexpensive deposit base; and a firm conception of the company’s niche all help produce repeated good results. The bank operates the state’s largest ATM network—over 500—and with so many of them in tourist areas, the machines are a profit center. These, plus a resurgence of construction and a maturing capacity for tourism, which promises more growth, married to a conservative approach, put Bank of Hawaii on top.

Ultimately, Ho says the bank’s performance hinges on its brand.

“We’re the largest independent bank in Hawaii,” he says. And Ho says the bank presents a community banking face to customers. don’t do things with campaigns driven by consultants. That’s just not our style” — Peter Ho-chairman, president, and CEO of Bank of Hawaii

Sticking to a state-centric focus

Bank of Hawaii’s finances are tied to its state more so now than once. The 117-year-old company went through a period of extensive international branching that began in the 1970s, in an effort to participate in the Pacific Rim financial boom. That was followed by retrenchment and elimination of that network in the wake of difficulties in Japan, and other factors. All of this occurred under earlier leadership.

“Prior to 2000 we were probably the world’s smallest money center bank,” says Ho. “But we’ve had a Hawaii-centric strategy for 14 years now. And we’re going to stick to our strategy, here in the islands.”

When Ho speaks of the bank’s present and future, then, it’s not surprising that he ties the state and the bank together more closely than some mainland banks do. Fortunately, Hawaii has been a good place to do banking business, in terms of credit, deposits, and other revenues.

Building and lending growth

A growing benefit to the bank is construction spending, and related borrowing, and Ho points out that an advantage is that multiple sources are feeding it. Just one is the building of a $5.5 billion transit project, an elevated train linking rural areas and the business district on Oahu. Both civic and private construction contribute.

“In the broader scope, we have pretty good legs here,” says Ho. “And we will see an impact on almost every form of revenue generation that we have at the bank.”

One such area is consumer borrowing—up 8%, not counting mortgages—where growth has been seen again as people continue to get over the shock of recession.

“I think the hibernation period is coming to an end,” says Ho. “There is a bit of a lag between commercial activity and consumer loan activity.” He notes that indirect auto loans, home equity credit lines, and installment lending are all picking up. The bank introduced a new credit card about a year ago and has over 13,000 new cardholders.

Bank of Hawaii is the largest home lender in the state, and expects to continue to be an active player in spite of the new mortgage rules.  Ho said that initially the company estimated that 17% of its pipeline would fall outside of QM’s scope, but that fewer loans appear to be affected because of provisions protecting non-QM lending that conforms to Fannie Mae rules.

The Hawaiian housing market tends to have a very different dynamic than mainland markets, according to Ho. There just isn’t as much Hawaii as there is of other places.

“So the issue of scarcity in housing really plays into our housing supply,” explains Ho. There are two results of this. First, Ho says, prices tend to be a bit more stable, over time, because there’s ongoing demand. (In 2013, single-family home sales were up 4.6%, and condo sales were up by 11.8%. Prices for both rose by nearly 5%.) Currently, they continue to rise. Second, homeowners are more willing to make sacrifices to keep paying their mortgages, rather than lose a hard-to-get home. Ho says this tends to encourage a conservative mindset.

That mindset also applies to the state’s lenders. Ho says subprime lending issues were not unknown in Hawaii, but, although all of the state’s banking institutions make home loans, the only players making subprime mortgages were out-of-state lenders.

Tourism keeps things going

“We’re selling a dream, an environment, nature, the Aloha spirit,” says Ho. As a result, Hawaii continues to be a place where people around the world want to vacation, or buy property.

Though softening a trifle, tourism continues to be stable, according to Ho. Further, he says, there is much potential for Hawaii in Chinese tourists. Currently they represent only a small portion of the tourist trade, which is 50% from the U.S. and 50% from international sources. Ho says this small Chinese showing is due to such difficulties as obtaining tourist visas from the U.S. in China and insufficient airline capacity between Hawaii and China. However, he says, improvements are underway in both regards.

And should growth pick up, that will mean more to Hawaii than simply more spending. Ho explains that tourist facilities on Oahu—home to Honolulu and Waikiki Beach—generally see 80% occupancy. The state’s other islands have been trending at around 70% occupancy. Significant growth would create the need for more facilities and create positive ripple effects.

However, says Ho, “our construction firms are running pretty chockablock today.” Hawaii doesn’t have as many construction workers as it did the last time tourist properties boomed. So, if and when demand increases, an influx of new workers will bring their own growth to the state.

Funding and margin advantages

Hawaii’s banking industry enjoys a deposit-rich market that is generally cheaper for funding than mainland markets. And, Ho points out, Bank of Hawaii has the lowest funding cost in the state—about nine basis points.

“We’re the core deposit market leader in the state,” says Ho, with deposits coming about 50% from business accounts and 50% from consumer accounts.

This, and good loan growth, have supported strong margins. Ho says the bank’s spread on loans is almost twice that on securities. With lending on the upswing, and the bank’s loan-to-deposit ratio standing at just 50%, says Ho, “the strategy is to reduce securities holdings and increase loans, and drive the margin up.”

Steve Cocheo

Steve Cocheo’s career in business journalism has taken him to all 50 states and nearly every corner of banking in institutions of all sizes. He is executive editor of ABA Banking Journal, digital content manager of, and editor of ABA Bank Directors Briefing. He coordinates the popular Pass the Aspirin and First Person features and wrote the booklet series Focus On The Bank Director. He is the only journalist to have sat in on three federal banking exams, was a finalist for the Jesse H. Neal national business journalism awards, and a winner of multiple awards from the American Society of Business Publication Editors.

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