2023-04-28 17:04:26 ET
Summary
- First Hawaiian, Inc. is a regional bank serving Hawaii, and it is being taken down with the sector.
- However, tourism remains strong, and Hawaii's economy is firing.
- Concerns over commercial loans and a run on bank deposits appear to be overblown.
- While First Hawaiian, Inc. margins have peaked, a 5.5% yield pays you to wait for a rebound.
First Hawaiian, Inc. (FHB) is a regional bank stock serving Hawaiian consumers and businesses. It is another specialized regional bank that we believe is well-insulated from the recent banking chaos. First Hawaiian stock, like so many other regional banks, has been crushed in the last few months, and we believe this is overdone here, especially as it continues to pay a nice dividend which now yields 5.5% as FHB stock has dipped under $19 per share.
We have initiated our earnings coverage of regional banks this month, and we are seeing some clear winners and losers. We have been most interested in trends in deposits to see if there is evidence of bank runs on deposits. So far, outside of the well-publicized troubled banks, we have not seen much evidence of widespread contagion. Most smaller regional banks have held up. We would consider First Hawaiian, Inc. a smaller one, and its key metrics suggest that the stock at $19 is a good long-term buy here, but also appears to be setting up for a nice trade.
First Hawaiian, Inc. just put out a strong quarterly report, with some mixed performance on key metrics, but not enough to justify the depressed level of shares for the long-term. The market should correct this. We continue to expect some choppy trading in the coming months for the overall market, and believe the overall market is going to sell off hard in late spring and summer, but this 5.5% yielding stock seems like it is in a good position to be bought for the long-term, and perhaps even a medium-term swing trade back toward $25 a share. Let us discuss the First Hawaiian, Inc. earnings first.
Results For Q3
First Hawaiian, Inc. saw revenues of $216.2 million in fiscal Q3 . This was a decent performance, growing 23.4% from last year. The top line beat was a driver of strength, but banks are prepping for recession and preparing for losses, which weighed somewhat on earnings, and it appears net interest margins have indeed peaked.
Margins were still strong, but higher costs of funds weighed. Net interest margin dipped 4 basis points to 3.11%, while net interest income was $167.2 million, a decrease of $4.5 million, or 2.6%, compared to $171.8 million for the prior quarter. This is very strong.
Net income was $66.8 million, or $0.52 per share, but was a $0.03 miss, largely driven by an $8.8 million provision for credit loss expense as banks prepare for possible recession. We also watch for loans and deposits. Average loan balances were $14.2 billion, an increase of $129.3 million, or 0.9%, from $14.1 billion at the start of the quarter. Growing loans is key, but we have to watch deposits. Total deposits did fall here, and that is a minor concern. We would not call this a bank run, but total First Hawaiian, Inc. deposits were down 1.9% in the quarter to $21.3 billion.
Efficiency Of First Hawaiian
The efficiency ratio is important to monitor for regional banks. We believe that the strongest banks have an efficiency ratio under 60%. First Hawaiian's efficiency ratio is strong, but it did worsen from the sequential quarter albeit the ratio is in better shape than where it was a year ago. For Q1, the ratio was 54.46%, an improvement from 59.04% last year, but worsened from 51.47% in Q4. The cost of funds is rising as banks are now paying much more on deposits and the yields on loans, while strong, are not keeping pace with the deposit yields. As such, First Hawaiian margins are narrowing.
The return on assets dipped to 1.10% from 1.28% in Q4, but is up from 0.93% a year ago. Further, the return on average equity is also strong but dipped from Q4's 25.93% to 20.78%. However it improved versus 15.08% a year ago. The allowance for credit losses was $147.1 million, or 1.03% of total loans and leases, a slight uptick compared to $143.9 million, or 1.02% of total loans and leases to start Q1. Net charge-offs were $3.2 million, or 0.09% of average loans and leases on an annualized basis, improving from net charge-offs of $3.5 million, or 0.10% of average loans and leases on an annualized basis to start Q1. Total non-performing assets were $13.8 million, or 0.10% of total loans and leases versus $12.0 million, or 0.09% to start Q1.
While these metrics are mixed, this is a strong-performing bank. We think the massive decline in First Hawaiian, Inc. shares is overdone.
Take-Home
Overall, the First Hawaiian, Inc. metrics suggest margins have peaked. The drop in deposits is perhaps the largest risk, so we will keep an eye on that. But, under $19 a share, First Hawaiian, Inc. stock is a buy with a 5.5% dividend yield that pays you to wait.
For further details see:
First Hawaiian: High-Yield Stock With Room For Growth