10 Mid Caps to Rule Them All

Seeking out the 10 mid caps to rule them all is the only logical follow-up to seeking the 10 small caps to rule them all. Unlike small-cap companies that offer investors the potential for high-risk, high-reward returns, mid-cap companies usually have significantly less risk built in because of their proven business track records. These companies offer either distinctive products or exceptional value to investors -- or possibly both.

For reference, here are the choices for the previous six weeks.

This week we're going to dig deep into the regional banking sector for a company that's been churning profits in a very depressed housing market: Bank of Hawaii (NYSE: BOH  ) .

What it does
Bank of Hawaii is a full-service regional banking company that provides banking and lending to consumers and small to midsized businesses, as well as investment services to residents of Hawaii, Guam, and the Pacific Islands.

How it stacks up
Many investors will immediately dismiss a regional bank located in the West because of the weak housing environment in that region, but Bank of Hawaii has kept both its profits and its dividend steady in the midst of the worst housing downturn in seven decades. Before you call me nuts and note that the company's revenue has fallen for three straight years before provisions, consider that its profits have generally held up over the financial crisis, and it hasn't reduced its quarterly distribution since 1988. Currently yielding 3.9% with a dividend payout ratio of 50%, the company balances a very juicy return potential with a highly sustainable payout.

Poor loan decisions and a housing-price implosion have left many West Coast banks battered and bruised -- but not Bank of Hawaii. Let's look at the company next to a few competitors, some big and some small, and you'll see why this company could be a no-brainer.

Company

Profit Margin

PEG Ratio

Dividend Yield

Bank of Hawaii

28.8%

1.83

3.9%

Zions Bancorp (Nasdaq: ZION  )

(11.9%)

7.12

0.2%

East West Bancorp (Nasdaq: EWBC  )

25.1%

1.06

1%

Central Pacific Financial (NYSE: CPF  )

(139.5%)

2.31

N/A

Citigroup (NYSE: C  )

15%

0.56

0.1%

Bank of America (NYSE: BAC  )

(4.1%)

1.23

0.4%

Data from Yahoo! Finance.

The regional banking sector is a graveyard for dividends, but Bank of Hawaii is a true standout. Half of the list, including Bank of America, currently has profit margins in the red. East West and Citigroup are the closest in terms of being a value to Bank of Hawaii, but Citi's tainted loan portfolio, coupled with East West's and Citi's pitiful dividends, are Bank of Hawaii's selling point.

How it could make you money
The reason Bank of Hawaii has been so successful in light of the economic downturn is its proactive rather than reactive business practices.

The bank has always maintained a relatively spotless balance sheet, which has allowed it to cope with industry downturns with relative ease. In its latest quarterly filing, profits did fall from the year-ago period, but deposits were up, credit and loan loss reserves fell by 77%, and the net interest margin rose. The efficiency ratio, which measures expenses as a percentage of revenue, decreased this past quarter from 60 to 56, evidence that the company is finding ways to become more profitable even with a tightening revenue stream.

Non-performing assets continue to fall as well. As of its latest quarter, non-performing assets totaled just 0.65% of all outstanding loans, which is on the low end of the industry average in the Pacific. This figure speaks to the company's strict lending practices even before the housing collapse. I'd rather see revenue stagnate for two or three years than see this company lend to the wrong crowd.

With the credit quality of its loan portfolio improving and on the heels of a likely series of interest-rate increases in the coming years, Bank of Hawaii is sitting in the driver's seat and appears to be a solid choice for the 10 mid caps to rule them all.

What's your opinion on Bank of Hawaii? Share your thoughts in the comments section below, and consider adding Bank of Hawaii to your watchlist to keep up on the latest in the Pacific regional banking sector.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of and has opened a short position in Bank of America. Try any of our Foolish newsletter services free for 30 days.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always accountable and never charges a monthly fee.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 29, 2011, at 7:14 PM, tennhogg wrote:

    I owned Band of Hawaii before a trip to the Islands in

    February. I was impressed with the tourism in Hawaii,

    especially the Japanese who were there in massive

    numbers. I increase my holdings after my return.

    The earthquake has probably hobbled tourism from Japan for a while. I like the longeivity and conservative approach of this bank.

  • Report this Comment On August 17, 2011, at 6:37 PM, jtofabc wrote:

    Have owned BOH in a DRIP account for my great Grand son since 1998. Doing well thank you BOH Old jim

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