FHB Financial Analysis

Analysis Date: 2/3/2025

Business Model

First Hawaiian Bank generates revenue primarily through net interest income, which is the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowings. They also generate non-interest income from service charges, fees, and other banking activities.

Revenue Sources

• Net Interest Income: Driven by loan and lease financing, investment securities, and interest-bearing deposits.
• Non-Interest Income: Includes service charges on deposit accounts, credit and debit card fees, other service charges, trust and investment services, bank-owned life insurance, and other income.

Income Statement Analysis

• Net interest income increased by 1.3% QoQ, driven by NIM expansion.
• Noninterest income decreased significantly by 44.9% QoQ, primarily due to a $26.2 million loss on the sale of investment securities in Q4 2024.
• Noninterest expense decreased slightly by 1.6% QoQ, indicating good expense control.
• Net income decreased by 14.6% QoQ, mainly due to the loss on securities sale impacting non-interest income, despite improvement in net interest income and controlled expenses.

Balance Sheet Analysis

• Modest growth in loans and leases (1.2% QoQ) and deposits (0.5% QoQ) indicates steady business activity.
• Cash and cash equivalents increased by 9.1% QoQ, suggesting improved liquidity.
• Investment securities (AFS and HTM) decreased slightly, likely due to the portfolio restructuring and reinvestment into higher-yielding securities mentioned by management.
• Total stockholders' equity decreased slightly by 1.2% QoQ, possibly influenced by share repurchases.

Capital Allocation

First Hawaiian Bank demonstrates a balanced capital allocation strategy: Dividends: Consistent quarterly dividend of $0.26 per share, reflecting a commitment to return value to shareholders. Dividend payout ratio around 63% in Q4 2024. Share Repurchases: Aggressive share repurchase program, with $40 million repurchased in Q4 2024 and a new $100 million program authorized for 2025, indicating confidence in the company's value and a commitment to enhancing shareholder returns. Business Reinvestment: Portfolio restructuring to reinvest in higher-yielding securities aims to enhance future net interest income, showing a focus on improving profitability. Loan growth also indicates reinvestment in core business activities.

Management Commentary

Finished 2024 with a very strong quarter highlighted by good performance across key earnings drivers.

8 basis points in NIM expansion driven by favorable deposit mix changes and rate outperformance.

Executed an investment portfolio restructuring...provided a 309 basis point increase in yield. This transaction is expected to increase net interest income by $8,600,000 and net interest margin by 4 basis points in 2025.

We expect expenses in 2025 to increase about 2% to around $510,000,000

Expected payoffs in the CRE and construction portfolios will continue to be somewhat of a headwind [to loan growth].

Overall Sentiment: Positive to cautiously optimistic. Management expresses confidence in the bank's current performance and future outlook, particularly regarding NIM expansion and earnings growth from balance sheet actions. They acknowledge some headwinds in loan growth due to payoffs but remain optimistic about origination activity. Expense management is also highlighted as a priority.

Recommendation

Rating: Hold

Reason for Rating: Hold recommendation based on a balanced view. Strong NIM expansion and proactive balance sheet management are positives. However, the one-time loss impacting net income in Q4 and expected headwinds in loan growth provide counterweights. The company appears well-managed, but near-term earnings visibility is somewhat mixed due to the one-off item and loan growth outlook.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/3/2025, 8:42:59 AM