First Hawaiian, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. First Hawaiian is a bank holding company whose principal subsidiary is First Hawaiian Bank, operating mainly in Hawaii, Guam and Saipan. BNP Paribas beneficially owned approximately 62% of the company at quarter-end.
Financial results and condition
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net interest income | $139.7 million | $129.3 million; up 8% |
| Net interest margin | 3.13% | 3.00% |
| Noninterest income | $48.7 million | $51.1 million; down 5% |
| Noninterest expense | $90.6 million | $86.0 million; up 5% |
| Provision for loan losses | $6.0 million | $4.5 million |
| Net income / diluted EPS | $68.0 million / $0.49 | $56.7 million / $0.41 |
| Efficiency ratio | 48.08% | 47.66% |
| Operating cash flow | $53.2 million | $65.0 million |
Management attributed higher net interest income to loan growth and improved loan and securities yields, partly offset by higher deposit funding costs. Lower income-tax expense—reflecting the Tax Act’s reduction of the corporate rate—also contributed to earnings growth. Return on average assets was 1.35% and return on average equity was 11.02%.
At March 31, 2018, total assets were $20.2 billion, loans and leases $12.5 billion, deposits $17.4 billion, and stockholders’ equity $2.5 billion. Long-term debt was $34,000. Cash and cash equivalents were $692.5 million, down from $1.03 billion at year-end; quarterly cash flow included a $249.7 million net deposit outflow and $112.5 million net investing outflow. The company reported $1.5 billion of available FHLB credit and $676.8 million of available Federal Reserve credit, neither drawn at quarter-end.
Regulatory capital remained well above minimums: CET1 and Tier 1 ratios were 12.73%, total capital was 13.77%, and the leverage ratio was 8.71%. The allowance for loan and lease losses was $138.6 million, or 1.11% of loans; annualized net charge-offs were 0.15%. Nonperforming assets were $12.1 million, or 0.10% of loans and other real estate owned.
Material changes and notable items
- Loans grew $186.8 million, or 2%, from year-end, led by commercial and residential real estate and commercial-and-industrial lending. Deposits declined $249.7 million, or 1%, with customers shifting balances toward higher-yielding products and public time deposits declining.
- Net unrealized losses on available-for-sale securities increased to $189.5 million from $122.9 million at December 31, 2017, primarily due to higher interest rates. The resulting after-tax securities loss reduced quarterly comprehensive income to $19.7 million, despite $68.0 million of net income, and contributed to lower equity. Management said it had no intent to sell the securities and did not expect to be required to sell before recovery; it reported no expected credit losses in the portfolio.
- The company early adopted ASU 2018-02, reclassifying $20.1 million from accumulated other comprehensive loss to retained earnings. The adoption did not materially affect the financial statements.
- Q1 2017 noninterest income and expense classifications were restated for an immaterial error; prior net income and EPS were unchanged. The company also adopted the revenue-recognition standard, with no material financial-statement impact.
- The board declared a $0.24 per-share quarterly dividend in April, payable June 8, 2018 to shareholders of record May 29.
Outlook, commentary and risks
No quantified earnings or financial guidance is provided in the filing. Management described Hawaii’s economy as performing well, citing tourism, employment and real-estate conditions, and said it maintained adequate reserves, liquidity and capital. It cautioned that results are not necessarily indicative of full-year performance.
Key exposures include the company’s geographic concentration in Hawaii and other island markets; sensitivity of margins, securities values and funding costs to interest rates; deposit competition and potential outflows; and credit risks tied to real estate, tourism, construction and local economic conditions. Management’s rate simulations estimated that an immediate parallel +200 basis-point shift could raise 12-month net interest income by 4.8% under its dynamic forecast (9.0% static), while a −100-basis-point shift could reduce it by 4.2% (4.8% static). These are model estimates, not forecasts, and depend on assumptions about balance-sheet and customer behavior.
A customer class action alleges improper overdraft-fee practices. The company disputes wrongdoing, is defending the case, and said it could not reasonably estimate a potential loss; no liability was recorded. The filing also describes tax matters related to prior reorganizations, including $93.9 million of California refund claims for which no benefit is currently recognized; the company said unrecognized tax benefits could decrease by as much as $107.6 million, plus interest and penalties, within 12 months. The transition-services agreement with BNP Paribas affiliates is scheduled to end December 31, 2018; management expects ongoing and one-time standalone-company costs, including potentially higher third-party service costs, but could not reasonably estimate future purchase obligations.
Important facts for investors to verify
- Whether continued loan growth and asset yields offset rising deposit costs, deposit outflows and the resulting pressure on net interest margin.
- How the securities portfolio’s unrealized losses evolve with interest rates, and whether liquidity needs ever require securities sales before recovery.
- Whether credit quality, especially construction and consumer lending, remains stable as the allowance and nonperforming assets change.
- The outcome and potential exposure of the overdraft-fee litigation and the California tax-refund claims, including related indemnification arrangements.
- The actual cost of completing the separation from BNP Paribas and the effect of the transitional-services agreement’s expiration.