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First Hawaiian (FHB): Navigating the Evolving Landscape with Resilience and Prudence
Published on September 24, 2024 | Ticker: FHB

First Hawaiian, Inc. (FHB) has demonstrated its ability to navigate the dynamic economic environment with a steadfast focus on prudent risk management and operational efficiency. The company's recent financial performance showcases its resilience, as it continues to deliver solid results amidst the shifting market conditions.

Financials

For the fiscal year ended December 31, 2023, First Hawaiian reported annual net income of $234,983,000 and annual revenue of $1,132,132,000. The company's annual operating cash flow stood at $254,110,000, while its annual free cash flow reached $238,122,000. These figures underscore the company's financial strength and its ability to generate consistent cash flows to support its operations and strategic initiatives.

In the second quarter of 2024, First Hawaiian reported revenue of $204.62 million, a slight decrease of 1.3% compared to the same period in the prior year. Earnings per share (EPS) came in at $0.48, compared to $0.49 in the year-ago quarter. The reported revenue exceeded the Zacks Consensus Estimate of $202.94 million, representing a surprise of 0.83%. The company delivered an EPS surprise of 14.29%, with the consensus EPS estimate being $0.42.

The company's performance in the second quarter was driven by several key factors. Net interest income was $152.85 million, compared to the $152.89 million average estimate based on three analysts. The net interest margin stood at 2.9%, in line with the average estimate. Total noninterest income was $51.77 million, exceeding the $50.06 million estimated by three analysts on average, primarily due to a $1.29 million increase in other service charges and fees and a $1.41 million increase in noninterest income-Other.

Noninterest expense was $121.55 million, $6.7 million lower than the prior quarter. The decrease was largely attributable to the absence of the $4.1 million FDIC special assessment recorded in the first quarter. The company's efficiency ratio improved to 59.2% in the second quarter, compared to the 61.4% average estimate based on three analysts.

Balance Sheet

Turning to the balance sheet, total loans and leases grew by $39.7 million over the prior quarter, driven by increased draws on existing construction loans and new leasing opportunities. Commercial and industrial (C&I) loans saw a boost of about $150 million in dealer flooring loans, partially offset by paydowns and payoffs of other C&I loans. The company's outlook for the full year is low-single-digit loan growth.

On the deposit front, total deposits declined by $351 million in the second quarter, primarily due to a $216 million decrease in public deposits. However, the company noted favorable trends in its deposit franchise, with the migration of noninterest-bearing deposits to higher-cost accounts slowing and the ratio of noninterest-bearing deposits to total deposits remaining stable at 34%. The total cost of deposits increased by only 5 basis points in the second quarter, compared to a 9 basis point increase in the first quarter, reflecting the company's ability to manage its deposit pricing.

Credit Quality

Credit quality remained strong, with the company's allowance for credit losses (ACL) to total loans and leases ratio unchanged at 1.12%. The company sold two criticized shared national credit (SNC) loans at par, totaling $27.5 million, as part of its ongoing credit monitoring and management process. Nonperforming assets stood at $18.01 million, a slight decrease from the prior quarter.

Geographic Diversification

Geographically, the company's loan and lease portfolio is primarily concentrated in Hawaii, which accounted for 68% of the total as of March 31, 2024. The U.S. mainland represented 24% of the portfolio, while Guam and Saipan made up the remaining 7%. This geographic diversification helps mitigate the company's exposure to any specific regional economic conditions.

Outlook

Looking ahead, First Hawaiian provided guidance for the third quarter, expecting the net interest margin to be relatively flat compared to the second quarter. The company believes that the balance sheet repricing dynamics support an upward trend for the net interest margin, but the timing and pace of any potential rate cuts by the Federal Reserve will impact the absolute level.

Capital Position

In terms of the company's capital position, First Hawaiian remains well-capitalized, with a Common Equity Tier 1 (CET1) ratio of 12.55% as of March 31, 2024. The company plans to restart its share repurchase program in the second half of 2024, as it believes the current capital levels provide ample flexibility to support its growth initiatives and return capital to shareholders.

Conclusion

Overall, First Hawaiian's performance in the second quarter of 2024 demonstrates its ability to navigate the evolving economic landscape. The company's focus on prudent risk management, deposit franchise stability, and expense discipline has positioned it well to capitalize on future growth opportunities while maintaining a strong financial foundation. As the company continues to execute its strategic priorities, investors can expect First Hawaiian to remain a resilient player in the banking industry.

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