First Hawaiian, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparative periods ended September 30, 2019. First Hawaiian is a bank holding company operating through First Hawaiian Bank, with substantial lending and deposit activity in Hawaii. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $134.0 | $143.1 | $400.5 | $433.8 |
| Provision for credit losses | $5.1 | — | $101.7 | $9.6 |
| Noninterest income | $48.9 | $50.0 | $143.8 | $145.8 |
| Noninterest expense | $91.6 | $93.5 | $279.5 | $279.4 |
| Net income | $65.1 | $74.2 | $124.0 | $216.6 |
| Diluted EPS | $0.50 | $0.56 | $0.95 | $1.61 |
| Net interest margin | 2.70% | 3.19% | 2.79% | 3.22% |
| Efficiency ratio | 50.01% | 48.41% | 51.32% | 48.20% |
- Revenue: Net interest income plus noninterest income was $182.9 million in Q3 versus $193.1 million a year earlier; nine-month totals were $544.3 million versus $579.6 million.
- Profitability: Q3 net income declined 12%; nine-month net income declined 43%. Nine-month return on average assets was 0.76%, versus 1.42% in 2019. The sharp rise in credit-loss provision was the main driver of the year-to-date earnings decline.
- Loans and credit quality: Loans and leases were $13.50 billion at quarter-end, up 2% from December 31, 2019. The allowance for credit losses was $195.9 million, or 1.45% of loans, versus $130.5 million, or 0.99%, at year-end. Nine-month net charge-offs were $29.4 million, an annualized 0.29% of average loans. Nonaccrual loans and leases were $17.6 million, or 0.13% of loans.
- Cash flow: For the first nine months, operating cash flow was $100.9 million, investing cash flow was negative $1.92 billion, and financing cash flow was $1.94 billion. Cash and cash equivalents ended at $816.3 million, compared with $694.0 million at the start of the year. Investing outflows chiefly reflected purchases of securities; financing inflows chiefly reflected deposit growth.
- Liquidity and funding: Deposits rose 15% to $18.90 billion from year-end, while cash and cash equivalents were $816.3 million and available-for-sale securities were $5.69 billion. FHLB and Federal Reserve borrowing capacities were $2.0 billion and $1.0 billion, respectively. The company had no short-term borrowings and $200.0 million of long-term borrowings at quarter-end.
- Capital: Stockholders’ equity was $2.73 billion. The company’s CET1 ratio was 12.22%, total capital ratio 13.47%, and leverage ratio 7.91%; the company and bank were classified as well-capitalized. Book value per share was $21.04 and tangible book value per share was $13.38.
Material changes versus comparable periods
- Q3 net interest income fell 6% year over year and net interest margin contracted 49 basis points. Lower yields on loans and securities outweighed lower deposit funding costs.
- Nine-month credit-loss provision increased $92.2 million year over year, reflecting COVID-19-related expected losses and adoption of the CECL accounting model. CECL adoption reduced retained earnings by $12.5 million after tax and increased the reserve for unfunded commitments.
- Noninterest income was slightly lower: reduced card fees and deposit service charges were partly offset by higher other income, including gains on residential mortgage loan sales.
- Deposits increased $2.45 billion and investment securities grew $1.62 billion from year-end, reflecting elevated liquidity and funding needs. PPP loans contributed $920.2 million to quarter-end loans; total loans also reflected declines in consumer balances and growth in some commercial and construction lending.
- Q3 noninterest expense decreased 2%, but the nine-month amount was essentially flat. The nine-month efficiency ratio worsened to 51.32% from 48.20%.
Outlook, management commentary, and risks
- Management gave no specific earnings or operating guidance. It stated that the duration and strength of Hawaii’s tourism and broader economic recovery remained highly uncertain. The filing reported Hawaii unemployment of 15.1% in September 2020 and visitor arrivals down 72% for the first nine months year over year.
- COVID-19-related loan payment deferrals covered 20,408 loans and leases totaling $3.02 billion, or 22.4% of loans, at September 30. The bank also had 6,015 PPP loans totaling $920.2 million; forgiveness and the portion ultimately remaining on balance sheet were uncertain.
- Management said low interest rates and the pandemic could pressure margins, fee income, credit quality, borrowers’ ability to pay, and collateral values. The loan portfolio is geographically concentrated in Hawaii, and exposure includes tourism, lodging, restaurants, and commercial real estate. Management’s rate-sensitivity analysis showed estimated 12-month net interest income changes of +11.2% for an immediate 100-basis-point increase and −3.8% for an immediate 100-basis-point decrease, based on a static balance sheet and stated assumptions.
- The company temporarily closed 26 branches and planned to close four permanently by November 2020; it reported reopening 18 temporarily closed locations from June through early November. It continued remote-work and operational-continuity measures.
- Management found no goodwill impairment in its Q3 assessment, but noted future pandemic-related developments could trigger an impairment. Legal proceedings were not expected to have a material effect; the filing also describes mortgage repurchase and legacy reorganization-related contingencies.
- The board declared a $0.26-per-share quarterly dividend in October 2020, payable December 4, subject to the stated record date. Management said liquidity and capital remained adequate.
Important facts for investors to verify
- How credit performance, deferral expirations, tourism recovery, and subsequent charge-offs affect the $195.9 million loan allowance and $24.6 million unfunded-commitment reserve.
- PPP forgiveness timing and how much of the $920.2 million balance remains outstanding, including its low 1% interest rate and effect on loan yields and capital.
- Whether unusually rapid deposit growth persists, and the cost and stability of deposits as pandemic-related liquidity flows change.
- Whether margin and fee-income pressure continues, particularly given low rates, Hawaii’s tourism concentration, and reduced card and service-charge revenue.
- Whether the filing’s non-GAAP “core” measures, CECL estimates, and interest-rate sensitivity assumptions remain comparable and reasonable; reported GAAP results should be assessed alongside these measures.