First Hawaiian, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are primarily with Q1 2016. First Hawaiian is a Hawaii-based bank holding company whose wholly owned subsidiary, First Hawaiian Bank, operates Retail Banking, Commercial Banking, and Treasury and Other. BNP Paribas owned approximately 62% of the company at quarter-end.
Key financial results
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net interest income | $129.3 million | $117.3 million; up 10% |
| Net interest margin | 3.00% | 2.77% |
| Provision for loan and lease losses | $4.5 million | $0.7 million |
| Noninterest income | $49.4 million | $73.5 million; down 33% |
| Noninterest expense | $84.3 million | $85.1 million; down 1% |
| Net income / diluted EPS | $56.7 million / $0.41 | $65.5 million / $0.47 |
| Core net income / core diluted EPS (non-GAAP) | $57.0 million / $0.41 | $51.1 million / $0.37 |
| Efficiency ratio | 47.18% | 44.57%; core ratio was 46.96% versus 49.98% |
| Operating cash flow | $65.0 million | $52.2 million |
Net income fell 13% year over year, principally because Q1 2016 included $25.7 million of securities gains, including a $22.7 million gain on Visa Class B shares, and Q1 2017 had a higher credit-loss provision. Excluding specified items, core net income increased. Net interest income benefited from loan growth and higher-yielding securities; rising deposit costs and lower loan yields partly offset the benefit.
Balance sheet, liquidity, and capital
- Total assets were $19.8 billion at March 31, 2017, up from $19.7 billion at December 31, 2016. Loans and leases rose 2% to $11.8 billion, led by commercial real estate and residential real estate. Available-for-sale securities increased 4% to $5.3 billion.
- Deposits increased 1% to $16.9 billion. Cash and cash equivalents were $777.6 million, down from $1.05 billion at year-end. Q1 investing cash outflow was $443.8 million, primarily reflecting securities purchases and loan growth; financing cash inflow was $104.3 million, including deposit growth and offset by dividends.
- Short-term borrowings were zero at quarter-end; long-term debt was $41,000. The company reported $670 million of credit lines from other U.S. financial institutions, $1.7 billion from the FHLB, and $705.6 million from the Federal Reserve, none drawn at quarter-end.
- Stockholders’ equity was $2.51 billion. The company and bank were classified as well-capitalized: company CET1 ratio 12.78%, total capital ratio 13.87%, and leverage ratio 8.52%.
- The quarterly dividend was $0.22 per share. A further $0.22-per-share dividend was declared in April 2017, payable June 9 to shareholders of record May 30.
Credit quality and material developments
- The allowance was $135.8 million, or 1.15% of loans, compared with $135.5 million, or 1.18%, at year-end. Net charge-offs were $4.1 million, versus net recoveries of $1.0 million in Q1 2016; consumer lending accounted for most current-quarter net charge-offs.
- Nonperforming assets declined to $7.7 million from $9.8 million at year-end; nonaccrual loans were 0.06% of loans. Loans 90 days past due and still accruing were $3.5 million. Management attributed the generally favorable credit profile partly to Hawaii’s economic conditions.
- BNP Paribas completed a secondary offering in February 2017; First Hawaiian received no proceeds and BNP Paribas retained approximately 62% ownership. The company expects $12.3 million to $17.0 million in aggregate incremental ongoing and one-time stand-alone/separation expenses annually in 2017 and 2018. Its transition services agreement is scheduled to end December 31, 2018, with some services ending earlier.
- Management cited strong Hawaii tourism and construction activity. No specific earnings or financial guidance was provided in the filing. Management cautioned that actual results may differ from forward-looking statements.
Risks, contingencies, and unusual items
- A January 2017 customer class action alleges improper overdraft-fee practices. The company disputes the allegations, is defending the case, and says potential loss cannot presently be reasonably estimated; no liability was recorded.
- The company reported $137.1 million of unrecognized tax benefits, including $93.9 million related to California refund claims for 2005–2012. It stated that up to $107.1 million of taxes and $5.1 million of related interest and penalties could potentially decrease within 12 months, subject to settlements and statute expirations.
- Investment securities had $99.3 million of gross unrealized losses, which management primarily attributed to interest-rate movements rather than credit concerns. Management reported no expected credit losses and no intent or likely requirement to sell the affected securities before recovery.
- Interest-rate sensitivity analysis estimated that an immediate parallel 100-basis-point increase would raise 12-month net interest income by 4.9% under the dynamic forecast; a 100-basis-point decrease would reduce it by 6.1%. These are simulations, not forecasts, and depend on assumptions about rates, balances, deposits, and prepayments.
- Substantially all lending is concentrated in Hawaii, Guam, and Saipan, exposing the portfolio to regional economic conditions and natural disasters. Other identified risks include interest-rate and liquidity risk, competition, cybersecurity and operational disruptions, regulatory change, and costs or contingent liabilities related to separation from BNP Paribas.
Investor verification priorities
- Confirm the drivers and sustainability of net interest margin growth, loan growth, and higher deposit funding costs.
- Assess whether credit-loss provisions and consumer net charge-offs remain consistent with portfolio growth and the allowance’s adequacy.
- Separate recurring performance from Q1 2016 securities gains and compare GAAP results with management’s non-GAAP core measures.
- Track the overdraft-fee lawsuit, California tax claims, and other reorganization-related contingent liabilities.
- Monitor stand-alone costs, BNP Paribas’s remaining ownership and control, deposit trends, liquidity availability, and exposure to interest-rate changes.