First Hawaiian, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. First Hawaiian, Inc. is a bank holding company whose principal subsidiary, First Hawaiian Bank, provides consumer and commercial banking services, primarily in Hawaii. BNPP completed its exit from the Company on February 1, 2019.
Financial performance
- Q3 revenue and earnings: Net interest income was $143.1 million, up 1% year over year; noninterest income was $50.0 million, up 5%. Net income was $74.2 million, up 10%, and diluted EPS was $0.56 versus $0.50.
- First nine months: Net interest income was $433.8 million, up 3%; noninterest income was $145.8 million, essentially unchanged. Net income was $216.6 million, up 6%; diluted EPS was $1.61 versus $1.48.
- Margins and efficiency: Net interest margin was 3.19% for Q3 and 3.22% year to date, each 8 basis points higher year over year. The GAAP efficiency ratio improved to 48.41% for Q3 from 49.36%, and to 48.20% year to date from 48.49%. Core efficiency ratio, a non-GAAP measure, was 47.25% for Q3 versus 46.90%.
- Credit costs: Q3 loan-loss provision was zero, versus $4.5 million in Q3 2018; year-to-date provision was $9.6 million, down 42%. Net charge-offs increased to $5.6 million in Q3 from $3.8 million and to $18.3 million year to date from $12.4 million. Allowance was $133.0 million, or 1.04% of loans, versus $141.7 million, or 1.08%, at year-end 2018.
- Balance sheet and funding (September 30, 2019 versus December 31, 2018): Assets were $20.6 billion; loans and leases $12.8 billion, down 2%; deposits $16.9 billion, down 2%. Cash and cash equivalents were $1.34 billion, compared with $1.00 billion. Short- and long-term borrowings totaled $600.0 million, versus $600.0 million at year-end, with $400 million reclassified to short-term as maturities approached. Stockholders’ equity was $2.65 billion, up 5%.
- Cash flows, nine months: Operating cash flow was $171.1 million, investing cash flow was $667.1 million, and financing activities used $497.8 million. Cash and cash equivalents increased $340.4 million to $1.34 billion.
- Capital and asset quality: Company CET1 ratio was 12.15%, total capital ratio 13.11%, and leverage ratio 8.68%; the Company and Bank were classified as well-capitalized. Nonaccrual loans were 0.03% of loans, down from 0.05% at year-end; nonperforming assets were $4.3 million.
Material changes and notable items
- Loan growth in commercial real estate and residential real estate was offset by a $408.9 million sale of commercial and industrial loans, lower construction balances, and consumer loan declines. Total loans fell $232.8 million from year-end.
- Interest income benefited from higher loan balances and yields, while higher deposit costs and borrowing balances partly offset the benefit. Average interest-bearing deposit cost rose to 0.83% in Q3 from 0.71% a year earlier.
- Noninterest expense increased 1% year to date. Higher compensation, contracted services, card rewards, and marketing costs were partly offset by lower regulatory assessments and other expenses.
- The securities portfolio declined $341.3 million to $4.16 billion. The Company sold 48 securities in January 2019 following a $24.1 million non-credit impairment write-down in December 2018, recording an additional $2.6 million net loss on the sale in 2019. Unrealized securities losses fell substantially, primarily reflecting lower market interest rates.
- The Company repurchased $98.8 million of shares and paid $104.4 million in dividends during the first nine months. The 2019 repurchase authorization was increased to $150 million; $51.2 million remained at September 30. The board declared a further $0.26-per-share dividend in October.
Outlook, risks, and contingencies
- The filing provides no specific full-year earnings or revenue guidance. Management described Hawaii’s economy as growing, supported by tourism, real estate, and tax revenue, while noting risks from mainland and international conditions, tourism and vacation-rental changes, housing affordability, trade tensions, global growth, and interest-rate and regulatory developments.
- Interest-rate sensitivity modeling showed that a gradual +100-basis-point move was estimated to increase next-12-month net interest income by 4.3%, while a -100-basis-point move was estimated to reduce it by 4.4%. An immediate +100-basis-point shock was estimated to increase it by 9.8%; an immediate -100-basis-point shock was estimated to reduce it by 10.5%. These are model scenarios, not forecasts; management said results are more sensitive than at year-end 2018.
- CECL was scheduled for adoption January 1, 2020. Based on then-current balances and economic forecasts, management estimated the allowance could increase approximately 10%–15%; the estimate remained subject to model, process, portfolio, and economic changes and could differ materially.
- Credit and operating risks include the Company’s geographic concentration in Hawaii, exposure to tourism and real estate, possible changes in deposit funding and liquidity, interest-rate and LIBOR-transition risks, cybersecurity and technology risks, and potential credit losses. About 73% of loans were in Hawaii.
- A class-action overdraft-fee settlement was court-approved in August 2019 and funded at $4.1 million; the expense had been recorded in 2018. Management did not expect other pending or threatened legal matters to have a material effect. Mortgage repurchase exposure was not considered material; one $0.4 million repurchase occurred year to date, with no pending requests reported.
Investor verification points
- Verify the effect of the $408.9 million commercial and industrial loan sale on loan growth, provision expense, and future net interest income.
- Monitor deposit levels and pricing, borrowing needs, and interest-rate sensitivity—particularly under falling-rate scenarios.
- Assess consumer net charge-offs and whether the 1.04% allowance remains adequate as CECL implementation approaches.
- Review the final CECL adoption adjustment against the preliminary 10%–15% allowance increase estimate.
- Track repurchases, dividends, capital ratios, and the quality and concentration of Hawaii-related credit exposures.