First Hawaiian, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
First Hawaiian is a bank holding company whose wholly owned subsidiary, First Hawaiian Bank, serves consumer and commercial customers, primarily in Hawaii, Guam and Saipan. This unaudited filing covers the three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. The quarter includes the initial economic effects of COVID-19 and the adoption of the CECL expected-credit-loss standard on January 1, 2020.
Financial performance and condition
| Metric | Q1 2020 | Comparable period / prior date |
|---|---|---|
| Net interest income | $138.7 million | $145.1 million in Q1 2019 |
| Net interest margin | 3.12% | 3.23% in Q1 2019 |
| Provision for credit losses | $41.2 million | $5.7 million in Q1 2019 |
| Noninterest income | $49.2 million | $47.1 million in Q1 2019 |
| Noninterest expense | $96.5 million | $92.6 million in Q1 2019 |
| Net income / diluted EPS | $38.9 million / $0.30 | $69.9 million / $0.52 in Q1 2019 |
| Total assets | $20.76 billion | $20.17 billion at December 31, 2019 |
| Loans and leases | $13.38 billion | $13.21 billion at December 31, 2019 |
| Deposits | $17.02 billion | $16.44 billion at December 31, 2019 |
Net income fell 44% year over year, primarily reflecting the sharply higher credit-loss provision and lower net interest income; lower income taxes partly offset the decline. Net interest income decreased 4%, as lower loan yields and a smaller average securities balance more than offset reduced deposit costs. Noninterest income rose 5%, partly because Q1 2019 included a securities-sale loss. The efficiency ratio increased to 51.33% from 48.20%; management cited the loss of expense reimbursements from BNP Paribas and higher technology-related spending.
Cash and cash equivalents were $1.05 billion at quarter-end, up from $694 million at year-end. Operating cash flow was negative $51.8 million, investing cash flow was negative $124.1 million, and financing cash flow was positive $534.7 million, principally reflecting a $575.0 million increase in deposits. Total borrowings were approximately $600 million: $400 million short-term and $200 million long-term. Remaining borrowing capacity was $1.8 billion at the FHLB and $737.8 million at the Federal Reserve, subject to collateral and availability.
The allowance for credit losses on loans and leases was $166.0 million, or 1.24% of loans, compared with $130.5 million, or 0.99%, at year-end. The filing reports net charge-offs of $6.1 million for the quarter, or 0.19% of average loans on an annualized basis. Regulatory capital remained above required levels: the company’s CET1 ratio was 11.65% and total capital ratio was 12.90%; the Bank and company were classified as well-capitalized. Stockholders’ equity was $2.66 billion. The declared quarterly dividend was $0.26 per share.
Material changes versus prior period
- Provision expense rose by $35.5 million year over year, reflecting increased expected lifetime credit losses amid COVID-19 uncertainty and adoption of CECL.
- Net interest income declined $6.4 million and net interest margin contracted 11 basis points year over year.
- Loans increased $168.6 million from year-end, led by commercial and industrial lending; deposits increased $575.0 million, including growth in public time deposits.
- Unrealized securities gains improved accumulated other comprehensive income; the portfolio’s fair value was $4.06 billion, down modestly from year-end.
- The CECL transition increased the loan allowance by $0.8 million and the reserve for unfunded commitments by $16.3 million before tax, reducing retained earnings by $12.5 million after tax.
Outlook, management commentary and risks
Management said the pandemic’s duration and economic effects were uncertain. Hawaii’s tourism shutdown and stay-at-home measures were expected to increase unemployment and depress local income and economic activity, with more pronounced effects anticipated in Q2 2020. The company expected higher nonperforming assets and adverse credit effects, and warned that record-low interest rates could reduce net interest income and margin. It provided no quantified earnings or full-year guidance.
The Bank temporarily closed 26 branches while continuing service across its markets. It offered loan deferrals, forbearance and fee relief, and participated in the federal Paycheck Protection Program (PPP). Management noted that PPP loans carry a 1% rate and may remain on the balance sheet if not forgiven; PPP participation also creates risks involving borrower eligibility, loan processing, servicing and forgiveness. Increased customer draws on credit lines and higher loan volumes could affect liquidity and capital.
In April, the board suspended the stock repurchase program; the company retained the option to reinstate it. The board also declared a $0.26-per-share dividend payable June 5, 2020. Management said pending or threatened legal proceedings were not expected to have a material effect. The filing highlights risks from the pandemic, Hawaii’s tourism and geographic concentration, credit quality, interest rates, funding and liquidity, operational and cybersecurity disruption, and possible future goodwill impairment. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How COVID-19’s effects on Hawaii tourism, employment and borrowers change credit quality, provision expense and nonperforming assets after March 31.
- Whether the $166.0 million loan allowance and $17.3 million reserve for unfunded commitments adequately reflect evolving expected losses and CECL assumptions.
- How deposit growth, line-of-credit draws, PPP lending and collateral availability affect liquidity, funding costs and capital.
- Whether low interest rates and loan repricing pressure net interest income and margin beyond Q1.
- PPP loan forgiveness, servicing and eligibility outcomes, including any potential SBA guarantee or repayment exposure.
- The sustainability of the dividend and any later decision to resume share repurchases.