First Hawaiian loans hit record, but lower interest rates pull down profits

First Hawaiian Bank is seeing solid growth in its loan portfolio, but low interest rates continue to drag down its earnings.

The state’s largest bank said net income fell 8 percent in the second quarter to $51.9 million from $56.4 million in the year-earlier period despite an improving economy.

"Interest rates are down and that’s affected our earnings," First Hawaiian President and CEO Bob Harrison said ahead of the results, due out today. "As rates have declined, deposit rates are basically flat, and as interest rates come down, that affects our net interest margin, which is the biggest driver of net income."

Net interest margin — the spread between the bank’s lending rates and deposit rates — decreased to 3.01 percent in the second quarter from 3.19 percent in the year-earlier period. Net interest income fell 3 percent to $109.2 million from $112.6 million while noninterest income, which includes service charges and fees, slipped 2.3 percent to $54.2 million from $55.5 million.

Interest rates have been kept low by the Federal Reserve through its purchases of mortgage and long-term Treasury bonds. The Fed’s stimulus plan is designed to reduce long-term rates and induce people and businesses to borrow and spend. When the economic recovery is strong enough, the Fed will reduce the stimulus and interest rates will move higher.

"The economy is getting better in Hawaii and across the country and that will lead to an increase in rates over time," Harrison said. "Exactly when and how much, I have no idea."

First Hawaiian’s loans and leases increased across all sectors last quarter and rose 7.3 percent to a record $9.2 billion from $8.6 billion a year ago.

"Loan growth has been pretty broad based," Harrison said. "It’s been solid in consumer as well as commercial. In the consumer area, we’ve seen good growth because businesses are recovering and, in the car business, people are buying more cars. In commercial, we’re seeing some business expansions. On residential, we’ve seen a transition from refinance to new purchases, but there’s still a tremendous number of people refinancing their homes. And now as rates start to pick up a little, people are looking at equity lines for credit as well."

First Hawaiian’s deposits edged up 2.1 percent to $12.9 billion from $12.6 billion a year ago while assets rose 3.1 percent to $16.6 billion from $16.1 billion.

The bank’s percentage of nonperforming assets — loans overdue by 90 days or more — to total assets remained one of the lowest in the United States at 0.22 percent compared with 0.23 percent a year ago. The bank’s efficiency ratio, which measures how much it costs the bank to make a dollar of revenue, rose to 46.1 cents from 42.9 cents.

First Hawaiian set aside $3.2 million for potential loan losses last quarter compared with $6.7 million a year ago.

"It’s been a good quarter," Harrison said.

"I see good loan growth and steady deposit growth. The quality of the (loan) portfolio is still extremely good. We continue to see better metrics for consumers. That’s a good sign. It means people are managing their debt in a reasonable manner, which is very good long term. It’s just a steady continuing recovery and we’re starting to see the confidence come back."

Bank of Hawaii, which will report its earnings Monday, is the state’s second-largest bank with assets of $13.5 billion at the end of the first quarter.

First Hawaiian, a wholly owned subsidiary of French banking giant BNP Paribas, is not required to separately report its earnings but does so voluntarily each quarter.

The Honolulu-based bank, founded in 1858, has 57 branches in Hawaii, three on Guam and two on Saipan.