First Hawaiian Bank (NASDAQ:) delivered strong financial results in the second quarter of 2024, reflecting a robust local economy in Hawaii characterized by low unemployment, consistent tourism, and a stable housing market. Despite a slight decline in visitor arrivals and spending, particularly on Maui, the bank demonstrated solid loan production and effective management of deposit costs. Credit quality remained high with improvements in key metrics, and the bank anticipates low-single-digit loan growth for the full year.
While net interest income experienced a marginal dip due to lower average balances, noninterest income saw a slight increase, and expenses were well controlled. Executives discussed the potential impact of a rate cut on the net interest margin and net interest income, expecting a temporary decline in NIM but an overall positive trend. The bank plans to resume share buybacks in the latter half of the year and is comfortable with the current dividend payout.
Key Points
- Strong financial performance in Q2 with good loan production and controlled deposit costs.
- Healthy local economy in Hawaii with steady tourism and stable housing market.
- Excellent credit quality with improved key credit metrics.
- Anticipated low-single-digit loan growth for the full year.
- Net interest income slightly declined while noninterest income increased.
- Share buybacks to resume in the second half of the year.
Outlook
- Expectation of low-single-digit loan growth for the full year.
- Temporary decline in net interest margin in the event of a rate cut with an overall positive outlook.
- Focus on loan growth and management of securities portfolio.
Bearish Highlights
- Decrease in visitor arrivals and spending, especially in Maui.
- Expected persistent decrease in public deposits, particularly in public time deposits.
- Anticipated decline in net interest margin in case of a rate cut.
Bullish Highlights
- Slight increase in noninterest income and decrease in noninterest expenses.
- Balance sheet dynamics expected to support an increase in net interest margin despite potential rate cuts.
- Strong housing market with rising prices and limited supply.
Misses
- Slight decline in net interest income due to lower average cash and investment securities balances.
Q&A Highlights
- Expectation that underlying balance sheet dynamics will mitigate the impact of rate cuts on net interest margin.
- Closely monitoring the HELOC portfolio with no issues beyond normal expectations.
- Decrease in demand in the automotive industry may lead to incentive programs by manufacturers.
- Stable multifamily criticized balances with a slight decrease in the denominator.
In summary, First Hawaiian Bank has shown financial resilience in Q2 2024, supported by a strong local economy and prudent financial management. The bank is confidently navigating the challenges of the economic environment, backed by its solid credit quality and strategic focus on loan growth.
InvestingPro Insights
First Hawaiian Bank (FHB) exhibited a commendable performance in Q2 2024, with InvestingPro data and tips offering deeper insights into the bank’s financial health and stock performance.
With a market capitalization of $3.33 billion and a P/E ratio of 14.77, the bank presents a stable investment profile. A slight revenue decrease of 2.18% aligns with the dip in net interest income, reflecting economic challenges.
InvestingPro Tips indicate caution from analysts regarding the bank’s upcoming earnings, with two analysts revising their estimates downward. Investors should consider this for future profitability. The stock is trading near its 52-week high, supported by strong returns over the past month and quarter, indicating investor confidence in the bank’s operations and dividend sustainability, with a 4.14% yield over 9 years.
For further analysis and insights, InvestingPro offers additional tips on First Hawaiian Bank. Readers can use the coupon code PRONEWS24 for up to 10% off a yearly Pro or Pro+ subscription. More InvestingPro Tips for FHB are available at https://www.investing.com/pro/FHB for a comprehensive understanding of the bank’s prospects.
Full Transcript – First Hawaiian Inc (FHB) Q2 2024:
Operator: Welcome to the First Hawaiian Second Quarter 2024 Earnings Conference Call. Participants are in listen-only mode, and the call will be recorded. Kevin Haseyama, Investor Relations Manager, will lead the call with Bob Harrison, Jamie Moses, and Lea Nakamura providing financial insights. The presentation is available on fhp.com. Forward-looking statements will be made, so refer to Slide 1 for our safe harbor statement. Non-GAAP financial measures will also be discussed.
Bob Harrison: The local economy in Hawaii remains strong, with low unemployment, steady tourism, and a healthy construction sector. Despite a slight decline in visitor arrivals and spending, the overall performance is positive, reflecting the resilience of the state’s economy.
The year-over-year decline was primarily driven by a drop in visitors to Maui, with Kauai and Hawaii island also experiencing small decreases in arrivals. Japanese visitors are slowly returning to Hawaii, but numbers remain below pre-pandemic levels. Despite reduced activity levels, the housing market has remained relatively stable. In June, the median sales price for a single-family home on Oahu increased by 6.7% compared to March, while the median sales price for condos decreased by 3.9% compared to last year.
In the second quarter, the company reported strong financial performance with good loan production, improving deposit trends, and well-controlled deposit costs. Credit quality remained excellent, and key credit metrics improved. Noninterest income was solid, and expenses were well managed, positioning the company for a strong second half of the year.
The balance sheet remained strong, with total loans increasing and deposit stability. Despite a decline in total deposits, the deposit mix remained favorable, contributing to a low total cost of deposits. Net interest income decreased slightly due to lower average balances, while noninterest income increased slightly. Expenses were lower than the previous quarter, and credit quality remained excellent.
Overall, the company had a successful quarter with positive trends that are expected to drive performance in the second half of the year. Loan production is expected to increase, deposit stability is anticipated, and credit quality remains strong. The company remains well-positioned for continued success. Your line is now open for questions and comments.
Steven Alexopoulos: Hi, everyone.
Bob Harrison: Good morning, Steve.
Steven Alexopoulos: I’d like to begin by discussing the loan outlook. You mentioned maintaining low single-digit growth, with a need for $300 million to $400 million of growth in the second half to achieve this. Can you provide more details on how you plan to reach this target, considering the challenges faced in the first half?
Bob Harrison: Certainly. We anticipate a decrease in paydowns in the second half compared to the first half. We expect a slowdown in indirect runoff and anticipate growth in commercial and C&I transactions to boost our loan balances. Dealer floorplan loans are also showing signs of improvement. Residential loans continue to pose a challenge, but we are optimistic about the other segments.
Steven Alexopoulos: Understood. Could you elaborate on the paydowns experienced in the first half and why you believe they won’t recur in the second half? What factors contribute to your confidence in this regard?
Bob Harrison: The paydowns in the first half were mainly due to loans being paid off, particularly in the construction sector. We have completed some sales and are not currently looking to reduce our portfolio further. Anticipated construction completions in the second half should help maintain loan balances. Dealer floorplan loans remain unpredictable, but we are closely monitoring this segment.
Steven Alexopoulos: Moving on to the margin and net interest income outlook, considering the potential rate cut in September, how do you foresee the impact on NIM and NII? Can you provide insights on whether NIM can be maintained or grown in the face of rate cuts?
Jamie Moses: While a rate cut may lead to a decline in NIM in the short term, our asset-sensitive balance sheet and strategic loan repricing should support NIM growth over time. Net interest income may be impacted by loan growth and portfolio adjustments, but we remain focused on optimizing our balance sheet to mitigate any adverse effects.
Bob Harrison: Additionally, stabilizing deposit balances and potential changes in interest rates will play a significant role in our ability to grow net interest income.
Steven Alexopoulos: Thank you. Lastly, regarding the securities portfolio, the low yield raises concerns. Have you considered restructuring the portfolio to improve yield, similar to other banks? What are your thoughts on this strategy?
Bob Harrison: While we acknowledge the benefits of portfolio restructuring, we believe that reducing securities and focusing on loan growth is currently the best approach for us. We will continue to evaluate our options and make decisions based on the overall impact on our financial performance.
Jamie Moses: I would like to clarify that the $1 million donation in Maui was a joint effort with the Federal Home Loan Bank, with the bank contributing $0.25 million and receiving a triple match from the FHLB. The total is $1 million. Just to provide that additional detail. Rewrite: In your previous discussion on deposits, you mentioned a decline in public funds, particularly in public time deposits, which are used to fill gaps on the balance sheet. This planned reduction is expected to continue over time. There is not much seasonality in other public operating accounts, as inflows and outflows depend on the operations of those entities. The pace of noninterest-bearing deposit migration has been better than anticipated, influencing the net interest margin. Bond runoff is around $50 million per month, with securities coming off at rates ranging between 2.15% to 2.25%. The increase in dealer floorplan this quarter may not indicate a sustained trend, as inventory levels are rebuilding due to moderating demand and increasing supply in the industry. Manufacturers may introduce incentive programs to help dealers move inventory, leading to potential volatility. The multifamily construction loan that was paid off caused the criticized balance in multifamily loans to tick up slightly, but overall there was no change in the amount of criticized loans due to a slight decrease in the denominator. The percentage changed slightly due to a small decrease in the denominator for the quarter.
Bob Harrison: Yes, the payoff can be seen on Slide 16, Timur.
Timur Braziler: Understood. Thank you for the questions.
Operator: Thank you. There are no further questions at this time. Kevin Haseyama will now provide closing remarks.
Kevin Haseyama: Thank you for your interest in First Hawaiian. Feel free to contact me with any additional questions. Thank you for joining us, and have a great weekend.
Operator: That concludes today’s conference call. Thank you for participating. You may now disconnect.
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