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First Hawaiian Bank and Bank of Hawaii share more differences than similarities

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The headquarters of First Hawaiian Bank, left, and Bank of Hawaii, right, stand across from each other at King and Bishop streets.

Photo: David Croxford

Profitability is the bottom line, but it’s not the end of the story.

Consider banks: In 2010 and 2011, Hawaii’s two largest financial institutions, First Hawaiian Bank and Bank of Hawaii, were also the state’s most profitable companies. Last year, they ranked first and third; First Hawaiian’s net income came to $216.92 million and Bank of Hawaii’s profits totaled $166.21 million.

That’s not surprising. After all, both are highly regarded in the banking industry. Forbes magazine has named Bank of Hawaii one of the best-managed banks in the country for each of the last seven years. Neither bank was hurt badly by the sub-prime mortgage debacle that laid waste to the balance sheets of so many mainland banks. Instead, both have remained steadily profitable and financially stable. And, while their ownership structure is different – Bank of Hawaii is an independent, publicly traded corporation, while First Hawaiian is a wholly owned subsidiary of Paris-based BNP-Paribas – operationally, they’re both committed to community banking. The average consumer would be forgiven for thinking the two banks, facing each other across Bishop Street, were mirror images of one another.

Yet, a closer look at the banks’ numbers suggests that they’re more different than they appear. Run a finger down the columns in their financial statements and it becomes clear that, despite superficial similarities, First Hawaiian and Bank of Hawaii make their profits in very different ways, focus on different assets and fund their operations with different liabilities. Parsing these differences is a good way to understand not only these two banks, but also how companies think about profitability in general.

By The Numbers

The best place to start is with their income statements. For banks, income comes from three broad categories. First, there’s the income they make lending money to customers. This is what most people think of as “banking,” and it’s straightforward: The bank takes deposits “borrowed” at 0 percent, or nearly 0 percent these days, and lends that money as, for example, residential mortgages at 3.9 percent interest or business lines of credit at 8 percent. The interest rate margin – the difference between what the bank pays for the deposit and what it charges for the loan – represents the return for the bank, minus taxes and expenses.

Banks also make money by investing, generally in safe, but not terribly profitable, securities like U.S. Treasuries or federal agency bonds and municipal bonds. Together, the lending and investing streams of income are called “interest income.” Banks also have a third kind of revenue called, not surprisingly, “noninterest income,” which includes fees and commissions they earn for services like trust management or financial advising. As interest rates fall, along with interest rate margins, this noninterest income becomes more important.

2012 Interest Income from Investments

Source: All charts in this story are based on Hawaii Business calculations using data from the Federal Financial Institutions Examination Council’s uniform bank performance reports.

A glance at the income statements of First Hawaiian and Bank of Hawaii reveals their different focuses. In 2012, First Hawaiian made about 12 percent of its interest income from investments, which is fairly typical of community banks of its size. At Bank of Hawaii, investment interest income was almost 39 percent. That’s more typical of a large, national bank than a community bank. To put it in perspective, Bank of America, the second largest bank in the country, made 27 percent of its interest income from investments.

That’s not to say Bank of Hawaii takes more risks. “It’s not an excessively aggressive portfolio,” says Jeff Rulis, senior research analyst with D. A. Davidson, a Montana-based financial consulting firm. “They keep the portfolio relatively short, in terms of duration. So, while the size of the portfolio may be larger, the inherent risk is pretty moderate.” It is, though, quite different from First Hawaiian.

Let’s take a closer look at that income statement: In 2012, Bank of Hawaii earned $123 million on mortgage-backed securities (not the risky kind that almost sank the financial markets in 2008, but securities that are backed by the goverment through agencies like Ginnie Mae and Fannie Mae), plus an additional $46.8 million from other investment types, like municipal bonds, U.S. Treasuries and agency securities. In contrast, First Hawaiian, though the larger of the two banks, earned only about $55 million from mortgage-backed securities and less than $7 million in other investment income.

On the loan side, though, the roles of the banks are flipped. First Hawaiian earned $442 million on its loans and leases, nearly twice Bank of Hawaii’s $268 million. Yet, the gross earnings for the two banks are similar: $676 million for First Hawaiian and $630 million for Bank of Hawaii. So, why would the income streams of two banks with such similar reputations be so different? In order to understand that, we have to look elsewhere in the financial statements.

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