Banking In Paradise

When Alan Landon talks about working in paradise, he doesn’t necessarily mean the sand beaches and soft tropical breezes of the Hawaiian Islands, although those are nice, too. Landon is chairman and chief executive officer at $10 billion Bank of Hawaii Corp., and when he talks about paradise he’s more likely to be thinking about the Hawaiian economy, which lately has been roaring like those big waves on Maui.

Life is very good in Landon’s corner of the world at the moment and he has the numbers to show it. Bank of Hawaii came in first on the 2005 Bank Performance Scorecard on the strength of a good all-around showing, which included third- and ninth-place finishes in the return on equity and return on assets categories, respectively, and high marks for asset quality, as well. But what’s the story behind the numbers? Landon and his management team have successfully refocused the bank on its core Hawaiian market, where opportunities abound. “They’ve done a very good job of leveraging their marketplace,” says analyst Jacqueline Reeves at Florham Park, New Jersey-based Ryan Beck & Co.

It wasn’t always so at Bank of Hawaii. The company got into trouble back in the late 1990s after an aggressive expansion program had taken it to California and various locations throughout Asia. “We had become America’s smallest international bank,” quips Landon. But the Bank of Hawaii brand meant little in most of those faraway markets, and according to Landon, the bank too often ended up with loans that other banks didn’t want, particularly since its loan officers were trying to compete with the locals by loosening up on terms and conditions. Commercial lending opportunities are somewhat limited in Hawaii since it doesn’t have a lot of industry, and the bank also used its retail deposits to fund a $3 billion portfolio of syndicated loans, which also experienced significant asset quality problems around the same time. Things got so bad that Bank of Hawaii was forced to operate under a memorandum of understanding with the Federal Reserve Bank of San Francisco and the Federal Deposit Insurance Corp.

Help arrived in 2000 when former Bank of America Corp. Chief Financial Officer Michael E. O’Neill was brought in as CEO. Under a three-year turnaround plan, O’Neill pulled the bank out of California and from all those Asian outposts and refocused its energies on Hawaii, while also cleaning up its loan portfolio. One of O’Neill’s top management recruits was Landon, who was brought in from Nashville, Tennessee-based First American Corp. to become Bank of Hawaii’s CFO. An accountant who had also spent 28 years at Ernst & Young, the 57-year-old Landon took over for O’Neill in September 2004.

Reeves says Landon is “very engaged in the business,” while New York-based investment banker Sandler O’Neill & Partners analyst Michael McMahon describes him as a “detail person who also seems to have an appreciation for sales and customer service. I think that Al is well regarded on Wall Street.” Landon is now two years into a second three-year plan, and his first objective is the acceleration of the bank’s revenue growth in its island markets, which include Guam and American Samoa. The Hawaiian economy is heavily dependent on tourism, which happens to be booming at the moment. “Right now the economy is great,” Landon says. “We’re on pace to set a record for tourism. We’re enjoying as good an environment as we’ve had in quite some time.”

According to Reeves, home prices and payroll employment also reached new highs in the second quarter of this year. Unemployment declined to 2.7% in the second quarter, well below the national average of 5%u00e2u20ac”while personal income grew by 6%. And construction activity was strong in both the private and military housing sectors.

Bank of Hawaii and its largest competitor, First Hawaiian Bank, a subsidiary of San Francisco-based BancWest Corp, both command about 25% of the local deposit market, according to Landon. A smaller thrift and various community banks control the other 50%. Although competition is stiff in such a highly concentrated market, Landon says it is at least “rational” when it comes to deposit and loan pricing.

The turnaround at Bank of Hawaii is complete, judging by its asset quality score for a linked four-quarter period that encompasses the third and fourth quarters of 2004 and the first and second quarters of 2005. The bank’s ratio of nonperforming loans to total loans and other real estate owned was just 0.18%u00e2u20ac”good enough for a 16th place finish in that category. And its reserve coverage, at 1.65%, ranked it 12th in that particular metric. Landon says its portfolio of syndicated commercial loans has been reduced to under $700 million, and the bank has stiffened its underwriting standards for that business.

A smaller balance sheet has also allowed Bank of Hawaii to return capital to its investors. Under a buyback program initiated in July 2001, the bank has returned $1.3 billion to its shareholders. Landon says he is aiming for a relatively lean 7% leverage ratio target, its Scorecard ratio was 7.42%, which ranked it 95th, and wants Bank of Hawaii to use its investors’ money carefully. “We had much higher capital levels (in years past) and were inefficient,” he explains. “When we can’t use it, we return it to shareholders.”

Going forward, Landon’s job will be to mine that rich Hawaiian economy for all it’s worth. In addition to its sizeable retail and commercial banking operations, the bank also has several subsidiaries that are focused on investment management and equipment leasing, along with insurance and insurance agency services. Landon wants to tie these businesses together through a better cross-sell performance, a strategy that McMahon heartily endorses. “The way they’ll grow is through selling more products to the customer base,” McMahon says.

The one way that Bank of Hawaii won’t grow is by reestablishing itself in some distant locale like California. Landon says the company has learned its lesson well. “Mainland expansion is not in our plans right now,” he says. “We have a lot of opportunities here at home.”