First Hawaiian, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2017; balance-sheet comparisons are to December 31, 2016. First Hawaiian is a bank holding company whose wholly owned bank operates primarily in Hawaii, with business in Guam, Saipan and the U.S. mainland. BNP Paribas beneficially owned approximately 62% of the company at quarter-end.
Key financial results
Amounts below are in millions, except per-share data and ratios.
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net interest income | $133.3 | $122.7 | $393.9 | $360.4 |
| Provision for loan and lease losses | $4.5 | $2.1 | $13.4 | $4.7 |
| Noninterest income | $48.5 | $48.7 | $146.8 | $168.6 |
| Noninterest expense | $83.7 | $82.8 | $253.2 | $246.3 |
| Net income | $58.4 | $53.2 | $172.0 | $173.6 |
| Diluted EPS | $0.42 | $0.38 | $1.23 | $1.24 |
| Net interest margin | 2.96% | 2.87% | 2.99% | 2.84% |
| Efficiency ratio | 46.00% | 48.31% | 46.83% | 46.56% |
- Profitability and period changes: Q3 net income rose 10% year over year, supported mainly by higher net interest income. Nine-month net income declined 1%; the prior-year period included $25.8 million of securities gains, including a $22.7 million Visa share sale.
- Margins and earnings drivers: Nine-month net interest income increased 9%, reflecting loan and securities growth and higher securities yields, partly offset by rising deposit costs. Interest expense on deposits increased to $28.3 million for the first nine months, from $19.6 million. Q3 net interest margin increased 9 basis points year over year; the nine-month margin increased 15 basis points.
- Revenue and expenses: Nine-month noninterest income fell 13%, primarily because the 2016 securities gains did not recur and BOLI income declined. Nine-month expenses rose 3%, including higher card rewards and regulatory assessment costs. Q3 noninterest income was nearly flat, with lower BOLI income offset by other income, including a $2.7 million property-sale gain.
- Cash flow: For the first nine months, operating cash flow was $214.5 million versus $179.2 million in 2016; investing cash outflow was $852.3 million versus $1,928.5 million; financing cash inflow was $700.1 million versus $274.9 million. Cash and cash equivalents ended at $1.114 billion, up from $1.052 billion at year-end 2016.
Financial position, credit and liquidity
- Total assets were $20.57 billion, up 5% from year-end 2016. Loans and leases reached $12.15 billion, up 6%; growth was strongest in commercial real estate and construction lending. Deposits were $17.60 billion, up 5%, with growth in time and money-market balances offset partly by lower savings and demand deposits.
- Stockholders’ equity was $2.58 billion, up 4%. Book value per share was $18.50 and tangible book value per share was $11.36. The company declared $0.66 per share in dividends during the first nine months, versus $0.42 in the prior-year period.
- Debt was limited: no short-term borrowings remained at quarter-end and long-term debt was $34,000. Cash and available-for-sale securities totaled approximately $6.43 billion. Additional undrawn borrowing capacity was $1.9 billion at the FHLB and $679.9 million at the Federal Reserve. Approximately $3.7 billion of securities were pledged, mainly to secure public deposits.
- The allowance for loan and lease losses was $137.3 million, or 1.13% of loans, compared with $135.5 million and 1.18% at year-end. Nine-month net charge-offs increased to $11.6 million from $5.2 million; management attributed much of the higher provision versus 2016 to a large commercial-loan recovery in the prior-year period. Nonaccrual loans were $7.9 million; nonperforming assets were $8.4 million, or 0.07% of loans and other real estate owned.
- Both the company and bank were classified as well-capitalized. At September 30, the company’s CET1 ratio was 12.71%, total capital ratio 13.77%, and Tier 1 leverage ratio 8.66%. The bank’s respective ratios were 12.67%, 13.73%, and 8.63%.
Outlook, commentary and risks
- Management described Hawaii’s economy as strong, citing tourism, low unemployment and housing demand, and said loan and deposit balances reached record levels. It reported continuing investment in high-grade securities and considered reserves, liquidity and capital adequate. No formal earnings or revenue guidance was provided.
- As the company transitions to a standalone public company and separates from BNP Paribas, management estimated incremental ongoing and one-time costs of $12.7 million to $17.2 million in aggregate per year for 2017 and 2018. Transitional services are expected to end by December 31, 2018, with some services ending earlier; actual costs could exceed estimates.
- Interest-rate sensitivity modeling estimated 12-month net interest income changes under an immediate parallel rate shift: at +200 basis points, +7.4% dynamic and +11.3% static; at +100 basis points, +4.5% and +5.7%; at −100 basis points, −5.5% and −6.4%. Management cautioned that actual results could differ due to deposit repricing, yield-curve changes, balance-sheet changes and other assumptions.
- Key risks include concentration in Hawaii and sensitivity to local economic conditions, tourism, real estate and natural disasters; interest-rate and deposit-funding pressures; consumer credit losses; competition, cybersecurity and operational risks; and the effects of BNP Paribas’ continued control and the separation. The filing reported no material changes to previously disclosed risk factors.
- A customer class action alleges improper overdraft-fee practices. The company disputes the allegations and is defending the case; it cannot reasonably estimate a potential loss and recorded no liability. Separately, unrecognized tax benefits totaled $138.9 million, including $93.9 million related to California refund claims; management said up to $107.2 million of taxes and $5.4 million of interest and penalties could decrease within 12 months through settlements or statute expirations.
Important facts for investors to verify
- Whether loan growth and improved net interest margin can offset deposit-cost increases as funding competition continues.
- Whether consumer loan charge-offs and provisions remain elevated, and how credit quality develops in the rapidly growing real estate portfolios.
- How much of reported noninterest income and core earnings is recurring, given prior-year securities gains and current-period property-sale and other unusual items.
- Actual standalone and separation costs versus management’s $12.7 million–$17.2 million annual estimate, and execution of the transition before services expire.
- Developments in the overdraft-fee lawsuit and California tax claims, including any change to estimated exposure or recognized liabilities.