As the credit and loan portfolio quality of banks slowly improve, investors seem content to seek out traditional options in the banking industry.
Wells Fargo, JPMorgan Chase and the usual cast of big-bank characters tend to dominate the headlines. But the other world out there we call regional banks has a ton to offer, and the best of the best remains $2 billion Bank of Hawaii (NYSE: BOH).
What's not to love?
Bank of Hawaii's recent quarterly earnings announcement didn't surprise the few investors and shareholders familiar with the financial leader in all things Hawaii. What makes Q2 impressive goes beyond increasing bottom line results by lowering provisions -- the amount set aside for bad loans. Bank aficionados have gotten used to seeing nice bottom line numbers driven by lower set-asides of late -- a la Bank of America.
The numbers
Compared to Q2 of 2011, earnings this past quarter significantly improved. The most recent quarter saw a nearly 16% jump in earnings to $40.7 million. Net interest income remained flat compared to the year-ago quarter, hardly concerning given the interest rate environment. In fact, it's borderline impressive considering the interest margin -- the difference between interest received and interest paid -- actually decreased to 2.98% this past quarter vs. 3.16% in 2011. In spite of the drop, the bank was able to essentially maintain interest income levels.
As for net profit and operating margins, both already sit at or near the top of the regional banking sector, and each improved in Q2 of 2012. Profit margins jumped to 30% from 27.22%, and operating margins improved nearly 3% quarter-over-quarter to 41.41%. Those ridiculously impressive results blow its competitors away. We'll get to them shortly, but a few more specs to whet your investment appetite.
CEO Peter Ho and his team run a tight ship and will continue to generate results. Another example of a solid management team is improvement in the bank's efficiency ratio vs. last quarter. The 56.77% in Q2 of 2012 compares to 63.81% in last year's quarter.
In addition to the efficiency ratio, a couple key measures to look at are return on equity and return on assets, and Bank of Hawaii's a sector leader in both. Return on equity improved to 16.19%, and ROA jumped to 1.19% vs. the year-ago quarter.
If you've read my prior posts, you know I look for banks that are growing core banking lines, like credit-worthy lending portfolios and deposits. Why? I'll take predictable revenues over the long haul any day, as opposed to generating vast, unsustainable sums from trading or investment activities. Revenues too exposed to the whims of the market don't sit well for my mid- to long-term investment taste.
With that said, let's take a look at how Bank of Hawaii fared in these crucial areas last quarter. Loans and leases rose to $5.7 billion for Q2, a 6% increases from the year-earlier quarter. Core deposits also improved to $11.55 billion, almost $1 billion more than 2011.
The competition
There are two regional banks that match up fairly well with BOH in a few key areas. The $3.1 billion East West Bank (Nasdaq: EWBC) return on assets is a close 1.15%, but its ROE is well below Bank of Hawaii's. Profit and operating margins? Close, but not quite to Bank of Hawaii's standards.
The other close runner-up to BOH is SVB Financial Group (Nasdaq: SIVB). At $2.52 billion, the banks are similar in market cap, and SVB's 1.51% return on assets is actually better than Bank of Hawaii's. But once again, its return on equity can't compare. Both operating and net profit margins are slightly better than Bank of Hawaii's, so what separates the two? Income. Lots and lots of income.
In addition to the outstanding financials and continued growth in critical areas, Bank of Hawaii provides shareholders with a whopping 3.9% dividend yield. Peers aren't even close, with East West Bank's clocking in at 1.8%. SVN Financial doesn't offer shareholders any income.
With all the banking options out there, it's not surprising "little" Bank of Hawaii has eluded much of the investment public. And that's a shame, at least for those not in the know. If you're a growth and income investor, forget the big boys -- Bank of Hawaii could be an ideal addition to your portfolio.
Want to compare Bank of Hawaii directly against the Wells Fargos of the world? Or see some additional regional banking options worth your consideration? Check out our special free report, "The Stocks Only The Smartest Investors Are Buying."
