First Hawaiian, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. First Hawaiian is a bank holding company whose principal subsidiary, First Hawaiian Bank, serves customers primarily in Hawaii, Guam and Saipan.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net interest income | $145.1 million | $139.7 million |
| Provision for loan and lease losses | $5.7 million | $6.0 million |
| Noninterest income | $47.1 million | $48.7 million |
| Noninterest expense | $92.6 million | $90.6 million |
| Income before income taxes | $93.9 million | $91.8 million |
| Net income | $69.9 million | $68.0 million |
| Diluted EPS | $0.52 | $0.49 |
| Net interest margin | 3.23% | 3.13% |
| Efficiency ratio | 48.20% | 48.08% |
Net income increased 3% year over year, supported mainly by higher net interest income. Net interest income rose 4%; management attributed the gain primarily to higher average loan balances and yields, partly offset by higher deposit costs and lower average securities balances. Average loan yields were 4.46%, up 39 basis points; interest-bearing deposit costs were 0.85%, up 31 basis points. Return on average assets was 1.38% and return on average equity was 11.16%.
Noninterest income declined 3%, including a $2.6 million loss on securities sales and lower other income, partly offset by higher bank-owned life insurance income and card fees. Noninterest expense rose 2%, with higher compensation, contracted services, marketing and card rewards partly offset by lower regulatory assessments and other expenses. The company also reported non-GAAP core net income of $72.1 million and core diluted EPS of $0.53; these measures exclude specified items and should be considered alongside GAAP results.
Financial position, liquidity and capital
- Assets and lending: Total assets were $20.4 billion, down from $20.7 billion at year-end. Loans and leases were $13.2 billion, up $121.3 million, or 1%. Commercial real estate loans increased $156.5 million; construction loans declined $31.3 million.
- Deposits and liquidity: Deposits fell $354.8 million, or 2%, to $16.8 billion, mainly from lower demand and time deposits. Cash and cash equivalents declined to $617.9 million from $1.0 billion. Q1 operating cash flow was $63.4 million versus $53.2 million a year earlier; investing and financing activities used $57.8 million and $391.4 million, respectively. Management cited $1.4 billion of available FHLB borrowing capacity and $669.6 million of FRB capacity.
- Debt: Long-term borrowings were $600.0 million, primarily FHLB advances at a weighted-average rate of 2.80%, maturing from 2020 to 2024.
- Credit: Allowance for loan and lease losses was $141.5 million, or 1.07% of loans, versus $141.7 million, or 1.08%, at year-end. Annualized net charge-offs rose to 0.18% from 0.15% in Q1 2018, driven mainly by consumer loans. Nonperforming assets were $4.4 million, down from $7.3 million at year-end.
- Capital: Total stockholders’ equity was $2.61 billion. The company and bank were classified as well-capitalized; the company’s CET1 ratio was 12.05% and total capital ratio was 13.06%.
- Shareholder returns: The quarterly dividend declared was $0.26 per share, versus $0.24 a year earlier. Book value per share was $19.36; tangible book value per share, a non-GAAP measure, was $11.98.
Material changes and unusual items
- BNP Paribas completed the sale of its remaining 24.9 million shares on February 1, 2019 and fully exited its ownership. Its remaining board designees resigned, and specified governance and consent rights terminated.
- The company completed the January sale of 48 investment securities that it had intended to sell at year-end. It recorded an additional $2.6 million loss in Q1; the proceeds were reinvested. Securities-related other comprehensive income improved by $53.4 million after tax, contributing to higher equity.
- Adoption of the new lease standard on January 1, 2019 resulted in an initial $50.3 million lease liability and $50.6 million right-of-use asset. At March 31, operating lease liabilities were $48.9 million.
- The board approved freezing the supplemental executive retirement plan to new benefit accruals effective July 1, 2019.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management described Hawaii’s economy as continuing to grow, supported by tourism and real estate, while noting softer visitor spending and home sales and a higher state unemployment rate year over year. Management cited loan growth, adequate reserves and strong capital. It also identified sensitivity to interest rates, deposit outflows, credit losses and local economic conditions. The loan portfolio is geographically concentrated: 70% was in Hawaii. Management’s modeled 12-month net interest income sensitivity was +5.6% for an immediate +100-basis-point rate shift and -6.9% for a -100-basis-point shift; actual results may differ materially.
A customer overdraft-fee class action settlement of approximately $4.1 million was funded during the quarter after preliminary court approval; final approval was scheduled for August 6, 2019. Management said other pending or threatened proceedings were not expected to have a material effect. The company also disclosed substantial unfunded credit commitments and letters of credit, and potential mortgage repurchase obligations, though it reported no pending repurchase requests at quarter-end. CECL adoption was expected in 2020; management was unable to reasonably estimate its impact.
Most important facts for investors to verify
- Whether loan growth and higher loan yields can continue to offset rising deposit funding costs and deposit declines.
- Consumer net charge-offs, allowance adequacy and the evolution of nonperforming loans and TDRs.
- The impact of the securities portfolio repositioning, including realized losses, interest-rate exposure and future securities income.
- Liquidity and funding trends, including deposit stability, borrowing capacity and the scale of unfunded commitments.
- Progress and eventual financial impact of CECL adoption, and resolution of the overdraft-fee settlement.
- Whether reported trends in Hawaii tourism, housing and employment affect the company’s geographically concentrated loan portfolio.