First Hawaiian, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. First Hawaiian is a Honolulu-based bank holding company; First Hawaiian Bank is its wholly owned bank subsidiary. BNPP owned approximately 62% of the company at quarter-end.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $131.3 million | $120.4 million | $260.6 million | $237.7 million |
| Net interest margin | 3.02% | 2.88% | 3.01% | 2.82% |
| Noninterest income | $48.9 million | $46.4 million | $98.3 million | $119.9 million |
| Provision for loan losses | $4.4 million | $1.9 million | $8.9 million | $2.6 million |
| Noninterest expense | $85.2 million | $78.5 million | $169.6 million | $163.5 million |
| Net income | $56.9 million | $54.9 million | $113.6 million | $120.4 million |
| Diluted earnings per share | $0.41 | $0.39 | $0.81 | $0.86 |
| Efficiency ratio | 47.32% | 47.04% | 47.25% | 45.72% |
Quarterly net income increased 4%, supported by higher net interest income and noninterest income, partly offset by higher expenses, credit-loss provision and taxes. Six-month net income fell 6%; the prior-year period included $25.7 million of investment-security gains, including a $22.7 million gain from the sale of Visa Class B shares. The reported six-month efficiency ratio comparison is also affected by those prior-year gains.
Balance sheet, liquidity and capital
- At June 30, 2017, total assets were $20.37 billion, up from $19.66 billion at December 31, 2016. Loans and leases were $12.06 billion, up 5%; deposits were $17.45 billion, up 4%.
- Cash and cash equivalents were $1.23 billion. Operating cash flow for the first half was $158.9 million; investing cash outflow was $570.9 million and financing cash inflow was $587.7 million.
- Short-term borrowings were zero at quarter-end; long-term debt was $41,000. The Bank reported $1.8 billion of available FHLB borrowing capacity and $685.9 million of FRB capacity, neither drawn at quarter-end.
- Stockholders’ equity was $2.55 billion. CET1 and total capital ratios were 12.73% and 13.81%, respectively; the company and Bank were classified as well-capitalized.
- The allowance for loan and lease losses was $136.9 million, or 1.13% of loans, versus $135.5 million, or 1.18%, at year-end. Nonperforming assets were $8.1 million, or 0.07% of loans and other real estate owned; nonaccrual loans were 0.06% of loans.
Material changes and management commentary
- Management attributed stronger net interest income to loan growth and a larger, higher-yielding securities portfolio; higher deposit costs partly offset the benefit. Average interest-bearing deposit cost rose to 0.32% in Q2 from 0.25% a year earlier.
- Loan growth was broad, particularly in commercial real estate, construction and residential real estate. About 69% of loans were in Hawaii, creating geographic concentration exposure.
- Six-month net charge-offs were $7.5 million versus $1.7 million in the prior-year period. Management cited the prior period’s large commercial-loan recovery as a principal reason for the higher provision comparison; consumer lending accounted for most current-period net charge-offs.
- Noninterest expense rose 9% in Q2. Notable drivers included contracted services and professional fees, card rewards, salaries and regulatory assessments. The FDIC assessment calculation and surcharge increased regulatory costs.
- Management described Hawaii’s economy as strong, citing tourism, employment and housing conditions, and said loan and deposit balances reached record levels. No specific earnings or revenue guidance was provided.
Outlook, risks and contingencies
- The company estimated incremental ongoing and one-time stand-alone and separation expenses of $12 million to $17 million in aggregate per year in 2017 and 2018. Actual costs could be higher; the BNPP transitional services agreement is scheduled to end December 31, 2018.
- Interest-rate simulation estimated that an immediate parallel +100 basis-point shift would increase 12-month net interest income by 4.8% under the dynamic forecast and 5.8% under the static forecast; a −100 basis-point shift would reduce it by 5.9% and 6.7%, respectively. Management cautioned that actual outcomes may differ materially from the simulations.
- A January 2017 customer class-action lawsuit challenges certain overdraft-fee practices. The company disputes the allegations, is defending the case, and said potential loss could not be reasonably estimated; no liability was recorded.
- The filing reports $93.9 million of unrecognized tax benefits related to California refund claims for 2005–2012, for which no benefit was recognized. The company said unrecognized tax benefits could decrease by up to $107.1 million of taxes plus $5.2 million of interest and penalties within 12 months, depending on settlements and statute expirations.
- Management identified risks including Hawaii and island-market concentration, interest-rate changes, deposit competition and outflows, credit quality, operational and cybersecurity events, regulatory changes, and BNPP’s continuing control. No material changes to the annual-report risk factors were reported.
Important facts for investors to verify
- Whether loan growth and net interest margin gains persist as deposit funding costs rise.
- Credit trends, especially consumer charge-offs, past-due loans and allowance coverage as the portfolio expands.
- The actual stand-alone separation costs and the terms and timing of replacement services after the BNPP agreement ends.
- Developments in the overdraft-fee lawsuit and California tax-refund claims, including any change in potential exposure.
- BNPP’s ownership and control, and the company’s interest-rate and Hawaii-concentration exposures.