First Hawaiian, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 30, 2018; comparisons are with Q3 2017 unless noted. Financial statements are unaudited. First Hawaiian is a bank holding company operating principally in Hawaii through First Hawaiian Bank.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $141.3m | $133.3m | $422.3m | $393.9m |
| Net interest margin | 3.11% | 2.96% | 3.14% | 2.99% |
| Noninterest income | $47.4m | $49.7m | $145.9m | $151.3m |
| Noninterest expense | $93.1m | $84.8m | $275.6m | $257.7m |
| Provision for loan and lease losses | $4.5m | $4.5m | $16.4m | $13.4m |
| Net income | $67.4m | $58.4m | $204.4m | $172.0m |
| Diluted EPS | $0.50 | $0.42 | $1.48 | $1.23 |
- Q3 net income rose 15% and diluted EPS 19%; nine-month net income rose 19% and EPS 20%. Lower income tax expense—reflecting the Tax Act’s reduction of the federal corporate rate—was a major contributor. Effective tax rates were 26.0% in Q3 and for the nine-month period, versus 37.7% and 37.3% in 2017, respectively.
- Net interest income increased as loan balances and yields rose and securities yields improved. Higher deposit funding costs partly offset those gains; the average rate on interest-bearing deposits was 0.71% in Q3, up 29 basis points year over year.
- Noninterest income declined 5% in Q3 and 4% year to date, reflecting lower deposit service charges and other income, including the absence of a 2017 gain on property sales. Noninterest expense rose 10% in Q3 and 7% year to date, including higher compensation and other costs.
- The GAAP efficiency ratio was 49.36% in Q3 versus 46.33%; the core, non-GAAP ratio was 46.90% versus 46.72%. Core net income, a company-defined non-GAAP measure, was $70.8m in Q3 and $208.8m year to date.
Balance sheet, liquidity, capital and credit
- At September 30, total assets were $20.0bn, down from $20.5bn at year-end 2017. Loans and leases grew 3% to $12.6bn, led by commercial and residential real estate; commercial and industrial loans declined. Investment securities fell 12% to $4.6bn, largely as maturities and paydowns funded loan growth.
- Deposits declined 5% to $16.7bn, including a $788m decrease in public time deposits and a $325m decrease in business analyzed demand accounts. Cash and cash equivalents were $699m, down from $1.035bn at year-end.
- For the first nine months, operating cash flow was $265.5m, investing cash flow was a $122.3m net inflow, and financing cash flow was a $723.0m net outflow. Cash and cash equivalents decreased $335.2m. Financing outflows included deposit runoff, $131.8m of share repurchases and $98.7m of dividends paid.
- Borrowings included $400m of FHLB advances at a weighted-average 2.84%, maturing in 2020, and $30m of federal funds purchased. Remaining secured borrowing capacity was $1.7bn at the FHLB and $713m at the Federal Reserve. Management cited available cash, securities, loan collateral and core deposits as liquidity sources.
- Stockholders’ equity was $2.42bn, down 4% from year-end; the decline reflected buybacks, dividends and an increase in unrealized securities losses, partly offset by earnings. Regulatory capital ratios remained well above minimums: CET1 12.09%, total capital 13.14% and Tier 1 leverage 8.42%. The company and bank were classified as well-capitalized.
- The allowance was $141.3m, or 1.12% of loans, compared with $137.3m at year-end. Nine-month net charge-offs were $12.4m, or 0.13% of average loans on an annualized basis. Nonperforming assets were $11.3m, or 0.09% of loans and other real estate owned; management characterized credit quality as stable.
- Investment securities were available-for-sale. Gross unrealized losses reached $244.8m, up from $122.9m at year-end, primarily due to higher interest rates. Management attributed the losses to rate changes rather than credit deterioration, reported no expected credit losses or other-than-temporary impairment, and said it did not expect to be forced to sell before recovery.
Material developments, outlook and risks
- On October 2, 2018, the company reached an agreement in principle to resolve a class action alleging improper overdraft fees and recorded a $4.1m Q3 expense. The settlement remained subject to court approval.
- BNP Paribas’ ownership was approximately 18% at quarter-end. Following the August offering, BNPP ceased consolidating First Hawaiian; the company’s transition-services agreement was scheduled to end December 31, 2018. Management expects stand-alone and vendor costs to increase, but could not reasonably estimate future purchase obligations.
- Management reported a generally strong Hawaii economy, supported by tourism, real estate and low unemployment, and continued loan growth. It flagged dependence on Hawaii and mainland economic conditions, tourism, interest rates, housing affordability and construction activity. No specific earnings or financial guidance was provided in the filing.
- Interest-rate simulations estimated that an immediate parallel +100 basis-point move would increase 12-month net interest income 4.2% under the dynamic forecast; +200 basis points would increase it 7.1%, while -100 basis points would reduce it 5.3%. These are modeled scenarios, not forecasts, and actual results may differ with deposit repricing, balance-sheet changes and other factors.
- Management could not yet estimate the impact of the expected 2020 adoption of CECL credit-loss accounting. It expected 2019 lease accounting adoption to increase reported assets and liabilities, with no material income-statement impact. The filing reported no material change in risk factors from the 2017 Form 10-K.
- Prior-period 2017 income and expense classifications were corrected for immaterial errors; net income and EPS were unchanged. The company also reported a $0.7m payment related to a Visa Class B share conversion-rate adjustment.
Important facts for investors to verify
- Whether deposit outflows persist and how higher deposit costs affect net interest margin and loan growth.
- Trends in delinquencies, nonperforming assets, consumer charge-offs and allowance adequacy as the loan portfolio grows.
- How unrealized securities losses and accumulated other comprehensive loss evolve if interest rates rise or securities are sold.
- Court approval and final cost of the overdraft-fee settlement, and the timing and magnitude of stand-alone transition and vendor expenses.
- Management’s eventual quantified CECL impact and the effect of the BNPP separation on capital, operations and ongoing costs.