Business Context and Reporting Period
Company: First Hawaiian, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1998
Business Overview: First Hawaiian, Inc. is a financial holding company operating primarily in Hawaii, with expanding operations in the Pacific Northwest, California, and international territories (Guam, Saipan). The company operates through its subsidiaries, including First Hawaiian Bank and Pacific One Bank.
Key Financial Metrics
| Metric | Q2 1998 | Q2 1997 | YTD 6 Months 1998 | YTD 6 Months 1997 |
|---|---|---|---|---|
| Net Income | $21.67 million | $22.27 million | $42.90 million | $42.78 million |
| Diluted EPS | $0.69 | $0.70 | $1.37 | $1.34 |
| Total Assets | $8.17 billion | $7.82 billion | $8.17 billion | $7.82 billion |
| Total Loans | $6.30 billion | $6.03 billion | $6.30 billion | $6.03 billion |
| Total Deposits | $6.20 billion | $5.88 billion | $6.20 billion | $5.88 billion |
| Net Interest Margin | 4.74% | 4.83% | 4.77% | 4.75% |
| Return on Average Assets | N/A | N/A | 1.07% | 1.97% (implied) |
| Return on Average Equity | N/A | N/A | 11.73% | 14.43% (implied) |
| Operating Cash Flow (YTD) | $91.97 million (1998) vs $42.43 million (1997) |
Material Changes vs. Prior Period
- Net Income: Q2 1998 net income decreased 2.7% compared to Q2 1997, while YTD 1998 net income increased 0.3% over the prior year. The modest YTD increase was driven by a lower average share count due to stock repurchases, offsetting flat earnings growth.
- Net Interest Income: Increased 2.1% YTD to $172.03 million, driven by a 1.8% increase in average earning assets. However, the Q2 net interest margin compressed 9 basis points to 4.74% due to lower yields on loans and higher funding costs.
- Provision for Loan Losses: Increased significantly by 76.4% in Q2 1998 ($7.52 million) and 48.7% YTD ($11.91 million) compared to 1997. This reflects the prolonged economic downturn in Hawaii and an 18% increase in consumer loan charge-offs.
- Nonperforming Assets: Decreased 12.0% to $86.14 million (1.36% of total loans and OREO) from $97.88 million in June 1997. This improvement was due to transfers of loans to Other Real Estate Owned (OREO) and sales of properties, though OREO balances increased by 40%.
- Noninterest Income: Increased 18.4% in Q2 and 13.2% YTD, largely due to gains on the sale of a corporate aircraft and a residence ($3.9 million and $2.1 million, respectively) and higher annuity/mutual fund sales.
Guidance, Outlook, and Risks
Pending Merger with BancWest
On May 28, 1998, First Hawaiian signed a definitive agreement to merge with BancWest Corporation (wholly-owned by Banque Nationale de Paris). The transaction is expected to close in Q4 1998.
- Expected Benefits: Management anticipates pre-tax annual cost savings of $23.2 million in 1999 and $41.0 million in 2000. Pre-tax revenue enhancements are estimated at $6.3 million in 1999 and $9.8 million in 2000.
- Restructuring Costs: A one-time pre-tax restructuring charge of approximately $67.0 million is expected upon consummation, primarily for employee separations and facility consolidations.
Management Commentary and Risks
- Economic Conditions: The company cites a "sluggish economy" in Hawaii as a primary headwind, with a protracted recovery from the 1991 recession. Conversely, mainland operations (Pacific Northwest) are experiencing expansion.
- Asia Pacific Exposure: Outstanding commitments and loans to Asian countries (including Japan) totaled $108.96 million (1.33% of total assets). Management notes potential adverse impacts from Asian economic downturns on tourism and spending in Hawaii.
- Year 2000 Compliance: The company is actively addressing Y2K issues with an estimated total cost of $9 million through 2000. Approximately $2.01 million had been expended by June 30, 1998. Risks include potential system failures and third-party non-compliance.
- Problem Loans: Management identified a potential problem loan of $10.03 million in Q2 1998 that is currently accruing but may be classified as nonperforming in future periods.
Investor Verification Checklist
- Merger Approval: Verify the status of regulatory and stockholder approvals for the BancWest merger and the timeline for closing.
- Loan Quality Trends: Monitor the $10.03 million potential problem loan and the trend in consumer loan charge-offs, which rose 18% YTD.
- Y2K Progress: Confirm the completion of testing for mission-critical systems and the assessment of third-party vendor compliance.
- Hawaii Economic Recovery: Assess the impact of the local economic downturn on future loan demand and nonperforming asset levels.
- Capital Ratios: Verify that the company maintains its "well-capitalized" status post-merger, particularly given the expected $67 million restructuring charge.