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First Hawaiian Bank pares reserves, tops earnings estimates

First Hawaiian Bank, indicating that it sees some signs of the state’s economy stabilizing, set aside far fewer reserves for potential loan losses in the third quarter than previous periods as the company’s earnings soared past analysts’ estimates and its stock jumped 6%.

The state’s largest bank reported today it set aside just $5.1 million for its loan-loss provision in the third quarter after reserving $55.4 million in the second quarter and $41.2 million in the first quarter.

First Hawaiian also said that “after further evaluation” it will permanently close four branches that were initially closed due to precautionary measures taken during the COVID-19 pandemic. The branches that will remain closed are at Sand Island, Eaton Square, King-Liliha and Wailea on Maui, and will reduce the bank’s total number of branches to 54.

First Hawaiian reported net income of $65.1 million, or 50 cents a share, that easily topped analysts’ consensus estimate of 28 cents, according to research firm Thomson Reuters. Shares rose $1.01 to close at $17.78, its highest level in two months.

“In spite of the current economic environment, we reported solid financial results for the third quarter,” First Hawaiian Inc. Chairman, President and CEO Bob Harrison said in a statement. “These are still challenging times, but the re-opening of the local economy, and more recently, the pre-testing program for trans-Pacific travel, are important steps toward the state’s economic recovery.”

Harrison, however, is still taking a guarded approach as visitors begin returning to the islands after taking COVID-19 tests.

”Our overall outlook on the economy hasn’t changed significantly since the second quarter and we continue to actively manage our credit risk,” he said on the company’s earnings conference call. He said the improvement in the bank’s asset quality resulted in the bank being able to limit its loan-loss provision expense.

First Hawaiian Chief Risk Officer Ralph Mesick said the bank granted 90-day deferrals to most borrowers, but for residential mortgages and some who had loans tied to Small Business Administration programs the bank provided up to six months of relief.

“About 77% of the loans by balance have completed their deferral period,” Mesick said on the conference call. “Around 96% of those loans have returned to payment with a small portion offered a second deferral based on additional considerations. The bulk of the loans remaining under the original deferral are related to residential mortgages. These are well-collateralized with only 3% of the balances showing a loan-to-value ratio over 80%.”

Mesick said the bank is operating under the assumption that the state’s economy is still in the early days of recovery.

“We have reserved (funds for potential loan losses) for what we think is appropriate given the composition of the portfolio,” he said. “I think over time … we’re going to expect to see some deterioration in asset quality metrics in the portfolio, but if the provision can stay relatively benign, maybe we would change our outlook. But right now I think our expectation going into this with the consumer was that we were going to have a lot more people having issues, but as it turns out, the return to pay has been fabulous.”

Even though the bank’s net income was down 12.3% from $74.2 million, or 56 cents a share, in the year-earlier period, earnings more than tripled from $20 million in the second quarter primarily due to the bank reserving fewer funds for troubled loans.

Banking analysts typically look at sequential quarter comparisons of banks’ results rather than year-over-year comparisons because seasonality is not as much a factor as in other industries. Sequential comparisons are also better indicator, especially during a recession and recovery cycle, when loan defaults are rising and interest rates are declining.

First Hawaiian said it also was maintaining its quarterly dividend at 26 cents a share. That puts the payout’s annualized yield at 5.8%, which is more than a percentage point higher than any other publicly traded local company. The dividend will be payable Dec. 4 to stockholders of record at the close of business on Nov. 23.

First Hawaiian’s loans rose 5% to $13.5 billion from the year-earlier period and deposits jumped 12% to $18.9 billion from the year-earlier quarter. However, the bank’s net interest margin, which is the difference between what the bank generates from its loans and pays out in deposits, considerably worsened by 49 basis points to 2.70% from 3.19% in the year-earlier quarter, but was up by 12 basis points from 2.58% in the second quarter.

First Hawaiian’s revenue fell 5.3% to $182.9 million during the quarter from the year-earlier period.

Compass Point analyst Laurie Havener Hunsicker said in a research report issued after the earnings release that the “return to payment trends are exceptional” and that she was reiterating her buy rating on the stock and raising her 12-month price target to $23, from $21.


DOWN EARNINGS ARROW

Third-quarter net

$65.1 million

Year-earlier net

$74.2 million

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